After more than a year of slowing sales, India’s software services companies that power corporations ranging from global banks to retailers to planemakers may finally be seeing light at the end of the tunnel.

Banks spending more on technology to meet regulatory mandates, companies upgrading SAP systems and a broader increase in technology spending after US elections due in November are some of the factors that have raised demand recovery prospects for India’s US$245 billion-plus IT services sector next year, according to BofA Securities, which raised its rating on Infosys Ltd. April 9.   

Tata Consultancy Services Ltd., Asia’s biggest IT services exporter, will report its fourth-quarter earnings Friday, followed by smaller rivals Infosys and Wipro Ltd. next week and HCL Technologies Ltd. on April 26. Sales have been slowing at these firms as their clients in the US and Europe have been reluctant to spend on large discretionary projects at a time of economic uncertainty, and the January-March quarter is also likely to have remained soft.

That may change now. With global economies showing signs of normalizing and the optimism over Fed interest rate cuts this year, analysts expect companies across key markets to spend more on technology that will drive higher growth forecasts by the Indian software services firms.

There are already some indicators of companies preparing for this probable demand upturn. Consensus estimates show most large IT companies are heading toward net headcount additions in the first half of 2024, after about a year of net reduction in staff on slower hiring, according to data compiled by Bloomberg. Kumar Rakesh, an analyst at BNP Paribas Securities, wrote in an April 1 note that an increase in job postings in recent months, especially for AI-related roles, is a sign of demand revival in the IT industry.

TCS and Infosys are pioneers in India’s IT services sector, which accounts for 7.5% of the South Asian nation’s more than US$3 trillion economy. The companies curbed costs, reduced hiring of engineering graduates and expanded to new technologies such as artificial intelligence to cope with the slowdown. The sector is key to Prime Minister Narendra Modi’s plan to add more jobs and expand skilled workforce as India is vying to replace China as the world’s next growth driver.  

In January, Infosys narrowed its sales growth forecast for the fiscal year ending March 2024, while TCS, which doesn’t give guidance, reported that December-quarter revenue grew 1.7% in constant currency terms, well below the double-digit pace of the previous year. Wipro’s sales for the three months to December fell 4.4% from last year and the company guided growth may be negative in the fourth quarter.

Executives from TCS and Infosys told investors after third-quarter earnings that the market had stabilized and clients were spending on AI-driven projects and software services that helped them cut costs.   

Upgrading their rating on Infosys, BofA Securities analysts Kunal Tayal and Jatin Kalra forecast higher transformational IT spends in 2025 after the US Presidential election, and bigger regulatory expenditure by banks to align with Basel III regulations. Earnings guidance from the companies next week could provide a “floor” to the outlook in what is again expected to be another soft quarter, they said.   

“FY25 estimates have been adequately cut over the last few quarters, leaving little room for further downgrades,” analysts at Mumbai-based brokerage Nuvama wrote in a note April 2.

Still, markets remain wary as a guage of IT sector stocks has given up nearly all of the gains from its rally during the previous earnings season, and a weaker-than-expected forecast from US-listed peer Accenture Plc sullied investor sentiment, putting further pressure on the upcoming earnings season to act as a catalyst.

  - Bloomberg