(Bloomberg) — Shares of India's vaunted IT outsourcing companies face a reality check as global investors flock to artificial intelligence themes, starting to leave expensive old-economy tech stocks behind. There is.
Unlike their counterparts in developed countries and China, Indian software makers, including leader Tata Consultancy Services, have yet to make significant progress in generative AI. Add to that the fact that the outlook for customer spending remains uncertain, and customers may soon start to look like yesterday's technology bets.
Deven Choksey, Managing Director, DRChoksey FinServ Pvt. Ltd. said, “The revenues and valuations of traditional software companies are at risk as their business models have not evolved with the times.”
BSE Ltd.'s index of Indian software stocks recently broke through a key support level and entered a technical correction. However, after years of gains in the domestic stock market, the company still trades well above its historical average earnings multiple.
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India's IT companies have experienced strong growth over the years as the world's largest companies outsourced vast amounts of back-office tasks to cut costs, a phenomenon known as “Bangaloreization.” Those revenues have slowed recently as overseas customers cut spending to cope with the difficult economy.
Meanwhile, software and internet giants such as Microsoft and Alphabet have invested billions of dollars in developing their own cloud products and large-scale language models.
“Coding is being left behind by computing in the world of technology investing,” Choksey said. He said Indian companies will embrace AI and offer better software-as-a-service solutions and infrastructure, such as Amazon.com's Amazon Web Services unit. To do so, they need to reinvent their business models faster.
TCS last month reported the slowest annual revenue growth in three years. Rival Infosys Inc. has released a lukewarm forecast for sales growth of 1% to 3% in the year to March 2025 on a constant currency basis, excluding the impact of currency fluctuations.
While Indian companies and global peers such as Accenture are speaking positively about AI, its contribution to sales is still small. TCS announced that its AI pipeline doubled to $900 million in the last quarter. This compares to the company's total annual revenue of approximately $30 billion.
A volatile geopolitical environment and uncertain macro outlook continue to weigh on customers' spending priorities. Jefferies Financial Group said the IT sector could be further downgraded after last quarter's revenue fell short of expectations.
Analysts Akshat Agarwal and Ankur Pant said in a May 7 note that “IT companies' results were disappointing with sales disappointing and management comments pointing to weaker-than-expected growth prospects. ” We see further risks to earnings over the last month, and we see limited upside for the stock.
High ratings also indicate caution. The BSE technical index is trading at 24 times forward earnings compared to pre-pandemic levels of around 18 times. This comes as indicators of sales and profit growth are below the levels enjoyed by the industry in 2019.
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Indian software makers are seen as laggards in artificial intelligence. Without significant progress in this area, companies face the threat of cannibalization of their businesses and could lose investor interest.
“The theme of companies increasing spending on AI while reducing non-AI spending is global in nature,” said Anurag Rana, an analyst at Bloomberg Intelligence. “There are no signs of a rebound.”
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