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Our analyses of the latest quarterly results of 24 global companies indicate no material improvement in the demand environment, as macro uncertainties prevail. Overall commentary remains broadly in-line with Indian IT companies. For IT services companies, weak discretionary spending, slower decision making, and revenue conversion amid uncertain macro environment, are leading to revenue softness in this quarter as well, with an uncertain recovery timeline. While select companies did highlight the emergence of green shoots in a few areas, the overall near-term environment remains soft. This implies that a muted growth scenario is likely to persist in the near term. Companies are hopeful of recovery throughout CY24, likely leading to H2 being better than H1. AI has also gradually transitioned from POC to deployment, though it remains a work in progress. Nifty IT has marginally underperformed the broader markets in the last one month due to a likely delay in US rate cuts and hopes of demand recovery shifting to H2CY24. We believe valuations for large caps are relatively less demanding, while mid-cap valuations are rich. Our pecking order remains as INFO, HCLT, TECHM, LTIM, TCS, and WPRO, among Tier-1 companies, and CYL and Zomato in mid-sized companies.

Demand remains subdued

Discretionary spending remains soft heading into 2024, resulting in continued leakage of revenues, despite strong deal intake in the previous few quarters. Deals were predominantly in the areas of cost takeout and efficiency programs, with focus on vendor consolidation. BFSI vertical remains the weak link in the current environment, with communications being the other laggard. Among geographies, Europe remains more resilient as compared to North America. Capgemini has alluded to a soft landing scenario in 2024, setting them up for a strong 2025. Even for FY24, it expects a trough in Q1CY24 followed by gradual improvement from Q2 onwards, and an attractive exit growth rate in Q4. Cognizant has highlighted that transformational work will return as uncertainty subsides and companies currently continue to focus on reducing costs, consolidating vendors, modernizing data and processes, and increasing productivity. For hyperscalers, cost-optimization pressures have receded though not completely over, with all major players indicating the same.

AI progress steady

Gen AI continues to remain a dominant theme across all companies’ discussions with demand gathering pace. It is on the path to becoming mainstream and contributing increasingly towards revenues. According to Forrester, Gen AI will have a 36% CAGR through 2030, and is likely to capture 55% of the AI software market; indicating rapid growth in overall adoption. IT services companies continue to train their employees to be better prepared for this adoption. Gen AI is also poised to drive transformational changes in operating models of companies, thus having long-term implications for them

Read through for Indian IT companies

Commentary on demand from global IT companies has largely remained unchanged over the last couple of quarters, and is in-sync with Indian companies. Guidance from the upcoming calendar year by Accenture, Capgemini, and Cognizant also reflects weakness in the near term. Most companies have highlighted that growth will gradually improve over the year as macro environment uncertainty recedes. Slower-thanexpected recovery can pose a risk to the high single-digit growth estimates that consensus/we are building-in for FY25. Given the anticipated slower recovery, Nifty IT has underperformed the broader market by 1% over the last one month. We continue to prefer large caps, given the relatively better valuations comfort.

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