Catch the insights on the outlook for IT stocks in 2024. Dive into the current state of the industry, potential catalysts for revival, and what this means for investors.
What’s Happening?
Contributing 8% to India’s GDP, the Indian IT Industry holds paramount importance, positioning the country as a global technology hub. Despite a lacklustre performance in large-cap IT stocks in 2023, the sector is gaining attention as the year concludes.
How Did 2023 Fare for the IT Industry?
While the Nifty IT Index yielded a 24% return in CY2023, the industry only captured investor attention towards the year-end. Examining the preceding year reveals challenges as clients in the West reduced discretionary spending, favouring cost optimisation over business transformation amid recession fears. Indian IT companies faced a conversion hurdle, slowing revenue generation and prompting industry leaders like Infosys and HCL Tech to revise down their revenue guidance for FY24.
Despite the challenges, midcap and small-cap counterparts outperformed, securing deal wins and revenue growth.
What is the Current State of the Industry?
Notable IT players Infosys and TCS are poised to report Q3 FY24 earnings on January 11, 2024, with HCL Technologies and Wipro following suit the next day.
The seasonally weak quarter, marked by fewer billing days and delayed decisions due to the holiday season in the West, may impact revenue growth amid client caution. Industry giants face challenges, such as a global client terminating a $1.5 billion multi-year contract for Infosys and internal issues for Wipro.
While valuations remain high, closer to their 5-year median, despite weak demand, the industry has gained prominence following the US Fed’s signals of rate cuts in December 2023.
The image depicts QoQ constant currency revenue growth for major Indian IT companies.
What’s in it for Investors?
Despite little change in the industry’s state, recent attention is fueled by the US Fed signalling rate cuts, potentially lowering inflation and allowing corporates to borrow at cheaper rates. This, in turn, benefits the banking and financial services industry (BFSI), a significant demand driver for Indian IT services. Investors are optimistic about improved revenue and order book growth.
While no substantial changes are on the ground, investors are advised to monitor these companies, awaiting an opportunity to acquire shares at reasonable valuations when a turnaround is imminent.
What’s Next?
With slower revenue growth, tracking the pace of cost takeout deals becomes crucial, providing companies breathing room amid reduced client spending on discretionary projects. Accenture’s last quarter results considered a leading indicator for Indian IT companies, do not indicate a demand revival.
Looking ahead, the clients’ budget for 2024 and the commentary from Indian IT companies will be pivotal in gauging the industry’s trajectory.
*The companies mentioned in the article are for information purposes only. This is not an investment advice.
*Disclaimer: Teji Mandi Disclaimer
