Indian IT Industry Prepares for Generative AI, Investors Display Cautious Optimism

Nomura, a leading financial institution, has recently published a comprehensive report on India's Information Technology (IT) sector. This report is a result of extensive interactions with more than 50 institutional investors from both the European Union (EU) and the United States over the past two weeks.

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Nomura, a leading financial institution, has recently published a comprehensive report on India's Information Technology (IT) sector. This report is a result of extensive interactions with more than 50 institutional investors from both the European Union (EU) and the United States over the past two weeks.

The report's release conveniently coincides with the impending second-quarter FY24 earnings announcements from prominent IT giants like Tata Consultancy Services (TCS), scheduled for October 11, followed by HCL Tech and Infosys a day later.

Nomura's report underlines that investors are displaying a certain degree of caution concerning the Indian technology sector. Nonetheless, this caution is notably less pronounced than it was a year ago.

A standout observation in the report is the exceptional readiness of Indian IT firms to embrace generative AI technologies. It highlights how these companies have substantially improved their capabilities to harness generative AI compared to the previous technological wave, which centered around cloud computing.

Within the realm of large-cap IT companies, Nomura has identified heightened investor interest in Infosys, TCS, Tech Mahindra, HCLTech, and Cognizant. Surprisingly, Wipro is notably absent from this list. In the mid-cap sector, Coforge and Persistent Systems have emerged as favored choices among foreign investors.

Nomura's report also addresses several pivotal queries concerning the IT industry's performance. It acknowledges concerns regarding the current demand cycle, especially within the Banking, Financial Services, and Insurance (BFSI) sector, where discretionary demand remains subdued. However, it posits that companies will continue to optimize their costs due to rising inflation in the United States and labor shortages.

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In terms of growth projections, Nomura anticipates a substantial bounce-back with an estimated growth rate of 8.2% for large-cap companies in the next year, a significant improvement from the 3.2% recorded in the current year.

Regarding margin performance, Nomura forecasts that while there may be some expansion, it may not reach the levels anticipated by the market a year ago. An increase of approximately 50 basis points, excluding Tech Mahindra, is expected. Tech Mahindra, with its unique initiatives and a lower base, might witness even more significant margin expansion.

Furthermore, Nomura predicts that the adoption of generative AI will grow gradually over the course of 18 to 24 months. This cautious approach suggests that while the industry is gearing up for this technological wave, the real transformation will take some time to materialize.