India’s IT growth trails global clients amid shift in tech spending; experts urge caution

The difference in income increases also signals a slowdown in growth. The IT industry isn’t entirely down to customers restricting their usual IT spending. The five largest IT services companies account for 28% of the country’s overall technology sector, and a slowdown in revenue growth could have a cascading effect on smaller rival companies.

“Our reluctance on IT Services continues to be based on an unconvincing revenue growth trajectory ahead. Prior to CY23, IT Services companies have exhibited a strong correlation with the revenue of S&P 500 and Stoxx Euro 100 (a convincing indicator of IT companies’ customer base),” ICICI Securities analysts Ruchi Mukhija, Aditi Patil and Seema Nayak said in a note dated November 28. “…this correlation has weakened since CY23, with revenue growth for the top 5 IT Services companies growing ~1-2%, while revenue growth for the S&P 500 and Stoxx 600 was ~3-5%+.”

The S&P 500 is a basket of the 500 largest publicly traded companies in the United States; The Stoxx Europe 600 index includes the largest companies in 17 countries of the European Union.

Traditionally, growth in large companies was an indicator of the prospects of the largest companies. IT services companies. This meant they had more money to invest in technology projects; This has led to faster growth of IT vendors and ultimately more business. However, according to analysts, automation has eliminated this concept. The divergence in growth makes it difficult to gauge which direction the sector is heading.

A modified playbook

Increased use of automation tools, shifting IT spending to product-based and AI infrastructure companies, and investments in in-house technology centers have contributed to this divergence.

Automation has changed the playbook of the country’s IT industry. According to a Mint According to the July 21 report, IT deals are priced based on the outcome rather than the number of people working on these projects. Mint It reported last month that higher revenue would not correspond to a commensurate increase in headcount as automation reduces the need to redeploy people to projects.

Revenue of India’s top five IT services companies Tata Consultancy Services Ltd, Infosys Ltd and HCL Technologies Ltd also recorded slower growth from January 2023 than Forbes Global 2000 companies, including JPMorgan Chase & Co, Microsoft Corporation and Saudi Aramco. According to a Nomura note dated November 27, quarterly growth of tier 1 IT outsourcing companies has fallen below 5%, while growth of G2000 companies has started to inch towards 5%.

The sharpest income growth gap occurred in the technology sector. The S&P 500’s technology revenue rose as much as 15%, while IT services companies’ technology revenue rose about 1%. ICICI analysts attributed this to the technology sector being one of the early adopters of GenAI and reducing spend on IT services by leveraging AI technology to better optimize costs.

The Big Five get 8-16% of their revenue from technology companies, including Microsoft and Apple. Among the top IT service providers, Wipro has the highest exposure to these companies. For now, analysts attribute the difference in overall revenue growth to three factors, including automation tools and client companies’ spending on global capacity centers (GCCs).

spending shifts

“IT Services revenue growth was historically significantly higher compared to S&P 500 and Stoxx 600, but this growth gap has reversed, likely due to 1) shift of IT spend to GCCs; 2) shift of spend to AI infrastructure and product companies; and 3) deflationary impact of AI-driven productivity,” ICICI analysts said.

Nomura added that IT outsourcing providers are hurt by automation tools because fewer people are billed to service a project.

“Initial deflation from AI is hurting net revenue growth (for domestic IT services companies) in an uncertain macroeconomic environment, causing customers to focus on cost-cutting and deferring discretionary spending,” Nomura analysts said.

The country’s Big Five are grappling with a challenging demand environment as growth slows compared to FY23 when the Covid pandemic caused companies to shift their operations online and outsource more work to IT outsourcing providers.

TCS, Infosys and HCLTech finished last year with revenues of $30.18 billion, $19.28 billion and $13.84 billion, up 3.78%, 3.85% and 4.3%, respectively. On the other hand, Wipro Ltd reported that its revenue decreased by 2.72% to $10.5 billion, while Tech Mahindra Ltd’s revenue decreased by 0.21% to $6.26 billion. In comparison, each of these companies grew by 7-12% in FY23.

Experts said this difference was due to the change in spending patterns of large multinational companies.

“S&P 500 companies have shifted budgets to AI infrastructure, data modernization and automation. These are heavy capex and cloud commitments, not traditional IT outsourcing deals,” said Phil Fersht, CEO of HFS Research. “Large organizations are growing revenues with AI-powered productivity, but they aren’t expanding the IT contracts that run the business like they have for 20 years.”

AI productivity

“Growth (for IT services companies) has not occurred in the technology services market because the market has been stolen or shifted by two important factors such as insourcing, where companies have started to do the work themselves,” said Peter Bendor-Samuel, founder of Everest Group. “The second factor is AI, where companies use AI themselves and not third parties. Another factor is that revenues are being squeezed as AI creates greater productivity and some technology services companies are already delivering work at over 30% productivity.”

TCS, the country’s largest IT services company, predicts more challenging days in the short term.

“IT services spending is stable and no significant change is expected in the near term. Ongoing uncertainties in the broader economic environment remain a significant challenge. Companies are keeping tight control over their discretionary budgets,” TCS CEO K Krithivasan told analysts on October 9.

Still, the company expects overseas revenue, which accounts for more than 90% of the total, to be better than in the previous fiscal. Nomura analysts expressed a similar view.

“A faster rate-cut cycle and improvement in the macroeconomic situation due to resolution of tariff issues could be a headwind for growth,” Nomura analysts Abhishek Bhandari and Karan Nain wrote in a Nov. 27 note. he said.

The decline in lending rates is reducing companies’ borrowing costs and allowing them to invest more in non-essential technology projects, a key source of revenue for Indian IT.