After more than a year of slowing sales, India’s software services companies that power corporations, ranging from global banks to retailers and plane-makers, may finally be seeing light at the end of the tunnel.
Banks spending more on technology to meet regulatory mandates; companies upgrading systems, applications and products, or SAP, systems; and a broader increase in technology spending after US elections due in November are some of the factors that have raised demand recovery prospects for India’s over US$245 billion (S$333 billion) information technology (IT) services sector in 2025, according to BofA Securities, which raised its rating on Infosys on April 9.
Tata Consultancy Services (TCS), Asia’s biggest IT services exporter, reported its fourth-quarter earnings on April 12, to be followed by smaller rivals Infosys and Wipro in the week after and HCL Technologies on April 26. Sales have been slowing at these firms as their clients in the US and Europe have been reluctant to spend on large discretionary projects at a time of economic uncertainty, and the January to March quarter is also likely to have remained soft.
That may change now. With global economies showing signs of normalising and optimism over Federal Reserve interest rate cuts in 2024, analysts expect companies across key markets to spend more on technology that will drive higher growth forecasts by Indian software services firms.
There are already some indicators of companies preparing for this probable demand upturn.
Consensus estimates show that most large IT companies are heading towards net headcount additions in the first half of 2024, after about a year of net reduction in staff on slower hiring, according to data compiled by Bloomberg.
Mr Kumar Rakesh, an analyst at BNP Paribas Securities, wrote in an April 1 note that an increase in job postings in recent months, especially for roles related to artificial intelligence (AI), is a sign of demand revival in the IT industry.
TCS and Infosys are pioneers in India’s IT services sector, which accounts for 7.5 per cent of the South Asian nation’s more than US$3 trillion economy. The companies curbed costs, reduced hiring of engineering graduates, and expanded to new technologies such as AI to cope with the slowdown.
The sector is key to Prime Minister Narendra Modi’s plan to add more jobs and expand the country’s skilled workforce as India is vying to replace China as the world’s next growth driver.
In January, Infosys narrowed its sales growth forecast for the fiscal year ending March 2024, while TCS, which does not give guidance, reported that December quarter revenue grew 1.7 per cent in constant currency terms, well below the double-digit pace of the previous year. Wipro’s sales for the three months to December fell 4.4 per cent from 2023, and company-guided growth may be negative in the fourth quarter.
Executives from TCS and Infosys said after third-quarter earnings that the market had stabilised, and clients were spending on AI-driven projects and software services that helped them cut costs.
Upgrading their rating on Infosys, BofA Securities analysts Kunal Tayal and Jatin Kalra forecast higher transformational IT spends in 2025 after the US presidential election, and bigger regulatory expenditure by banks to align with Basel III regulations. Earnings guidance from the companies later in April could provide a “floor” to the outlook in what is again expected to be another soft quarter, they said.
“FY25 estimates have been adequately cut over the last few quarters, leaving little room for further downgrades,” analysts at Mumbai-based brokerage Nuvama wrote in a note on April 2.
Still, markets remain wary as a gauge of IT sector stocks has given up nearly all of the gains from its rally during the previous earnings season, and a weaker-than-expected forecast from US-listed peer Accenture sullied investor sentiment, putting further pressure on the upcoming earnings season to act as a catalyst. BLOOMBERG
