Has the pecking order changed for the IT majors? Kumar Rakesh explains

Time of India

3 days ago

Kumar Rakesh
, Associate Director- Equity Research,
BNP Paribas
, highlights the Indian IT sector's resilience over three decades. Despite challenges like the dotcom bubble and Covid, it has consistently grown. While Gen AI presents opportunities, its impact will vary across companies.
Infosys and Persistent Systems
are early leaders, leveraging partnerships and AI capabilities.
With respect to Infosys, what are you building in and with respect to the commentary, which are going to be the key monitorables for you?
Kumar Rakesh:
For Infosys we are building relatively stronger growth. In the context of the rest of the IT services, we think Infosys will outperform the larger pack. We are building more than 2% sequential constant currency growth for the company this quarter, which will be partly helped by the acquisition they have done. About 40 bps of growth is coming in from that. But even excluding that, on an organic basis, we are expecting them to report a healthy 1.6-1.7% sequential growth and that is partly on a very low base of the last quarter. The fourth quarter for Infosys was quite weak and hence coming from a low base, it should see a pick-up in growth.
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From the management commentary perspective, this
earning season
started with TCS results and sparked off the debate on whether the IT services demand has started seeing a material hit and the possibility of Indian IT services companies seeing a bigger impact compared to some of the larger peers because the commentary which was coming in from the global peers was far more stable demand environment.
Through the earning season we have seen that the commentary largely converges towards a stable demand environment. and we would look out for a similar commentary from Infosys as well, that the demand environment continues to be stable. Obviously the guidance as well built in the commentary and the guidance the company is going to give will be the key focus.
What is the pecking order right now from the earnings that have come by? It was always TCS up there and then Infosys and then the rest? Has it changed at all after TCS and Wipro's earnings?
Kumar Rakesh:
At the start of this month as with our preview, we had shifted our preference to Infosys over TCS. Part of the reason was that we do see that TCS has some of the client specific issues that they will have a more lumpy performance. That being said, TCS valuation continues to look very attractive and hence there is a downside support in the TCS valuation. That being said, from an outperformance perspective, Infosys could be a preferred pick partly because of valuation, but more importantly because of the growth outperformance that the company can deliver compared to most of the other largecaps peers in the sector.
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The margin also seems to be relatively more stable. We will have to watch out how that goes out today as they report, but our expectation would be that
Infosys earnings growth
will be among the highest this year compared to most of the other largecaps.
In terms of the verdict that we have seen across the board from
largecap IT companies
, so far we have either seen a miss versus estimates or inline, nothing positive. When do you see this trend reversing because of the guidance that some of the companies have given? It does say that by the end of FY26, they can expect some improvement in margins. When do you see this turnaround coming about?
Kumar Rakesh:
You are right as the general performance in this quarter has been quite mixed, largely a disappointment on growth as well as margin for many of the companies. A lot depends on the macro, how the US macroeconomic environment starts shaping up. There is a fair degree of uncertainty.
A lot of tariff related deals are yet to be signed and that continues to elevate the uncertainty especially in verticals related to retail, CPG, and manufacturing, especially automotive within manufacturing and hence those verticals could take longer to start showing any recovery. The good news is that the BFSI vertical continues to remain quite resilient. Some of the companies even called out that even discretionary spending in that vertical seems to be there and hence that is one vertical which will continue to drive the growth for the next couple of quarters.
Technology services is another vertical which seems to have bottomed out and started showing good results. These are the two verticals which we would expect to start driving growth and as the macro starts improving, the trade deal starts getting signed, and the uncertainty starts coming down, hopefully by the end of this financial year we would expect the rest of the verticals also to start showing recovery.
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Once that happens, the FY27 essentially becomes the recovery year which is where investors will start focusing on that this financial year will largely be a low single-digit growth year but can we get to the mid-single-digit sort of a growth in FY27 and if that happens, then the interest will start coming back into IT.
The other debate that is going on is with respect to the AI transition because some experts believe that for Indian IT companies they have managed to get hold of the latest in technology and this can hold true yet again as well. Help us analyse your take on how Indian IT companies are expected to win this particular race. Do you believe that Indian companies are well versed to go ahead and adapt this particular technology and also which companies can actually be the early winners over here?
Kumar Rakesh:
We agree that if you go back over the last two-three decades starting from the mainframe transition, then the digital technologies came, a lot of SaaS players also came in the market. Through all those transitions the expectation was that the Indian IT services industry will take a hit but that did not happen. Over the last three decades, we have never seen Indian IT services industry's revenue to decline on a year-on-year basis, and so that is quite a resilient performance and during this period of time we have seen the dotcom bubble, the global financial crisis, multiple macroeconomic challenges in Europe and US and the Covid. Through all these phases, the Indian IT services industry has shown quite a strong resilience in its performance. We also believe it is a quite resilient industry. That being said, while we believe that on the Gen AI side, it would be net neutral to net positive for the industry, there would be some, who would be a bigger beneficiary and there could be some companies that could see a negative impact as well. It's a little too early to start calling out who would be negatively impacted but there are some companies who have started taking some initial lead in terms of building capability on Gen AI and also participating in clients' transformation on the Gen AI journey.
Infosys is one of those companies. They have done a fair bit of work. Their partnership with some of the global Gen AI leading hardware companies as well as their own capability on the small language model which they are building seems to be quite promising. The other company which stands out is Persistent Systems that is doing a fair degree of work on Gen AI and some degree of that decoupling between the employee growth and revenue growth is already visible in that company.
So, these are a couple of companies which have already started showing some initial signs of leadership outperformance from the Gen AI side and we are closely tracking that.