Shares of India’s vaunted IT outsourcing companies are facing a reality check as global investors’ rush into artificial intelligence begins to leave exorbitant old-economy technology stocks behind.
Unlike their counterparts in developed countries and China, Indian software makers, including leader Tata Consultancy Services Ltd., have not yet made significant progress in generative artificial intelligence. This, combined with a still shadowy customer spending outlook, could soon make them look like yesterday’s tech bets.
“The profits and valuations of customary software companies are at risk because their business models are not evolving with the times,” said Deven Choksey, managing director of DRChoksey FinServ Pvt.
The BSE Ltd. Indian Software Stock Index has recently fallen through key support levels and entered a technical correction. However, after a years-long rally on the domestic stock market, its quotations still remain well above the historical average profit multiplier.
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Indian IT companies have experienced years of mighty growth as the world’s largest corporations outsourced huge amounts of office work to save money, a phenomenon known as “Bangalored”. These revenues have declined recently as foreign customers cut spending to cope with complex economic conditions.
Meanwhile, software and Internet companies such as Microsoft Corp. and Alphabet Inc., are investing billions in developing their own cloud offerings and vast language models.
“Coding is being left behind by computer science in the world of technology investing,” Choksey said. Indian companies need to reinvent their business models faster to embrace artificial intelligence and deliver better software-as-a-service solutions and infrastructure, as Amazon.com Inc.’s Amazon Web Services unit is doing. – added.
Last month, TCS reported its slowest annual sales growth in three years. Competitor Infosys Ltd. issued a parsimonious forecast for revenue growth of 1-3% for the year ending March 2025 on a constant-currency basis, eliminating the impact of exchange rate fluctuations.
While Indian companies and their global peers such as Accenture Plc are speaking positively about AI, its share in sales is still miniature. TCS said its AI pipeline doubled to $900 million in the last quarter, which compares with total annual revenue of about $30 billion.
An unstable geopolitical environment and uncertain macro outlook continue to impact customer spending priorities. The IT sector could see further downgrades after sales missed expectations last quarter, according to Jefferies Financial Group Inc.
“The performance of IT companies was mainly disappointing, and management’s commentary points to weaker-than-expected growth prospects,” wrote analysts Akshat Agarwal and Ankur Pant in a May 7 note. “Despite consensus estimate cuts of up to 7%. last month we see further downside risks limiting share price growth.
High valuations also indicate caution. The BSE technology benchmark is trading at 24 times estimated earnings compared to pre-pandemic levels of about 18 times. This comes as sales and profit growth rates have fallen below industry levels achieved in 2019.
Indian software developers are seen as laggards in the field of artificial intelligence. If there is no significant progress in this area, they may lose investor interest as their business is at risk of cannibalization.
“The theme of corporations spending more on AI while cutting back on non-AI spending is a global one,” said Anurag Rana, an analyst at Bloomberg Intelligence. “We see no signs of a rebound.”
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