TCS, Infosys Gain As Tech Spending Proves Better Than Feared
(Bloomberg) -- Tata Consultancy Services Ltd. and Infosys Ltd. shares climbed, after India’s two biggest IT firms signaled a long-awaited recovery in global tech spending may finally get underway in 2024.
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The pair, which helps firms from banks to retailers manage IT functions across the globe, told investors after announcing earnings that clients were spending on AI-driven projects and software services that helped them cut costs. While both reported sluggish single-digit sales growth Thursday, executives were upbeat in their assessment of a global IT market that’s struggled to recover during a time of economic uncertainty.
TCS Chief Operating Officer N. Ganapathy Subramaniam said the market had stabilized, while Infosys Chief Executive Officer Salil Parekh said its order book looked strong. Tata rose as much as 4.2% while Infosys rose 7.7%, the highest intraday gain in three years, helped by a slew of brokerage upgrades.
“Overall, the situation has not deteriorated from the last quarter. Given all the things that we are all hearing from everybody, the fact that there is no deterioration is itself a positive sign,” Subramaniam told a news conference in Mumbai. “There is a demand out there, and that’s something that we have to go and capture as it matures.”
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TCS and Infosys lead India’s $245 billion-plus IT services sector, where growth has slowed as enterprise customers in the US and Europe limit investments to cope with high interest rates and inflation. Russia’s war on Ukraine has also led to economic uncertainty for businesses.
But investors are betting on a 2024 bounce-back. Before Friday, TCS and Infosys shares had risen roughly 10% over the past two months on expectations the slump had run its course.
TCS “valuation is not cheap, but in the event of improving growth momentum and earnings upgrade, premium is likely to be sustained,” Morgan Stanley analyst Gaurav Rateria wrote in a note, upgrading his rating on the stock to overweight.
Read more: Infosys Rises on Deal Wins, Growth Expectations: Street Wrap
On Thursday, Infosys narrowed its sales growth forecast for the fiscal year ending March 2024 to between 1.5% and 2%, expecting clients to remain cautious about purchasing software services. TCS’s December-quarter revenue grew 1.7% in constant currency terms, decelerating from the previous quarter and well off the double-digit pace of the previous year.
To cope with the slowdown, the companies have curbed expenditure and reduced hiring of engineering graduates, who typically bank on a job offer from IT giants. They’ve also expanded to new technologies such as artificial intelligence, seeking to spur demand.
Beyond the current trough, TCS, Infosys and their rivals remain optimistic about the long-term growth prospects of India’s showpiece IT services industry, which accounts for 7.5% of the South Asian country’s more than $3 trillion economy. They expect long-term demand to be fueled by the rising business need for AI and cloud services.
TCS, Asia’s biggest outsourcer, is betting on its partnership with OpenAI-backer Microsoft Corp. to develop artificial intelligence-based software services for clients, seeking to win higher margins and spur growth, Chief Executive Officer K Krithivasan told Bloomberg News previously.
--With assistance from Mayumi Negishi and Helen Sun.
(Updates with share action from the third paragraph)
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