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Aditya Birla Sun Life AMC Limited

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    IT Services: Green Shoots in Demand

    Transcript

    Jul 15, 2024
    2 Mins Read
    Mahesh Patil
    Kunal Sangoi
    Sarthak Batra

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    After the initial Covid-induced accelerated tech spends from 2020-2022, the last one or two years have seen enterprises rationalising excessive spending and a pullback in discretionary spends, led by geopolitical tensions, concerns over economic slowdown, and high interest rates. This has led to the BSE Teck index underperforming the broader BSE 500 index by 8.1% and 9% over the last 1 and 3 years. We believe this was a cyclical slowdown and we are on the verge of a revival in tech spending which should also lead to the sector starting to do well vis-à-vis the broader market.




    Source: ABSLAMC Research, Bloomberg


    For the past 15 years, Indian IT services have grown every year, despite several instances where most global corporations witnessed revenue contraction or decline. We have seen tech intensity (tech spending as a % of revenues) for companies only go up over the years. Most of the enterprises are early in their digital transformation journey with only 40% of workloads transitioned to the cloud (only 20% are modernized). The explosion of data in the past decade, advanced analytics, and customers' demand for a better experience have made it mandatory for enterprises to modernize their systems, thus the need to embark on large-scale digital transformation programs. BFSI – which is the largest vertical for Indian IT services is seeing green shoots in demand as macro uncertainty has reduced, and banks increase investments in risk and compliance, and new areas such as AI/ML.


    Generative AI/AI has become the topic of conversation in all boardrooms and most of the enterprises are running some pilot project on the same. To attain the full benefits of the efficiency that AI/Generative AI promises, enterprises would need to fix their data strategy first, which would include migrating data to the cloud, and modernizing their databases. Indian IT services are the implementation partners for Hyperscalers, SaaS companies, which would benefit from this AI wave and have continued to invest in building capabilities around AI/Gen AI. While Generative AI might impact low-end work (BPO/Testing), we believe AI would be a net positive for the sector as the companies would be able to handle more volume of work with higher efficiency.


    Overall, while the commentary remains cautious, we expect the earnings for the sector to have bottomed out and see signs of stabilization in the demand environment. We expect the demand for IT services to rebound in CY25 as major central banks start a rate-cut cycle and uncertainty around the US election recedes. We believe the IT sector can be a good defensive bet with a large addressable market, high-quality companies, and an excellent execution track record. The sector looks attractive to take exposure as valuations are reasonable (supported by strong cash flows and high payout ratios) and is likely to see an acceleration in revenue growth.


    BSE Teck one-year forward PE premium (x) over Nifty 50



    The views expressed in this article are for knowledge/information purpose only and is not a recommendation, offer or solicitation of business or to buy or sell any securities or to adopt any investment strategy. Aditya Birla Sun Life AMC Limited (“ABSLAMC”) /Aditya Birla Sun Life Mutual Fund (“the Fund”) is not guaranteeing/offering/communicating any indicative yield/returns on investments. The sector(s)/stock(s)/issuer(s) mentioned do not constitute any research report/recommendation of the same and the Fund may or may not have any future position in these sector(s)/stock(s)/issuer(s).


    The article was first published in Financial Express on July 08, 2024


    Mutual Fund investments are subject to market risks, read all scheme related documents carefully.



    Mahesh Patil

    About Author

    Mr. Mahesh Patil is the Chief Investment Officer (CIO) of Aditya Birla Sun Life AMC Limited. As the CIO Mahesh oversees over INR 3 lakh crore of assets under management. With over thirty years of rich experience in fund and investment management, Mahesh leads the entire investment team, comprising fund managers and analysts. He personally manages funds such as Aditya Birla Sun Life Frontline Equity, Aditya Birla Sun Life Multi-Cap Fund, and Aditya Birla Sun Life Focused Equity.

    Mahesh has been with Aditya Birla Sun Life AMC since October 2005. Mahesh was awarded the India CIO of the Year, Equity by Asia Asset Management in 2016 and 2018. He has been awarded Chairman’s Individual Award by The Aditya Birla group for being an Accomplished Leader in 2015.

    He has previously worked at CMC Limited, Tata Economic Consultancy Services, Parag Parikh Financial Advisory Services Limited, Motilal Oswal Securities Limited and at Reliance Infocom Limited.

    He holds a Bachelor’s Degree in Engineering from the University of Bombay and a Master’s degree in Management Studies from University of Bombay. He has also qualified the Chartered Financial Analysts examination from the Institute of Chartered Financial Analysts of India (ICFAI), Hyderabad.

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    Kunal Sangoi

    About Author

    Mr. Kunal Sangoi is a Fund Manager and Senior Analyst with Aditya Birla Sun Life AMC Limited (ABSLAMC). Kunal comes with an experience of 16 years in capital markets, in the areas of equity research and portfolio management. At ABSLAMC, he is responsible for manging select equity funds as per the given mandate and specialises in the Technology, Internet, Media and Telecom sectors.

    He has been with ABSLAMC since 2012, and was previously associated with Edelweiss Financial Services Ltd. in its Institutional Equity Research team as Senior Analyst.

    Kunal is a Chartered Accountant by qualification.

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    Sarthak Batra

    About Author

    Mr. Sarthak Batra is an Equity Analyst with Aditya Birla Sun Life AMC Ltd. He brings with him nearly seven years of experience, with his primary specialisation in the IT industry and Internet sector. He has previously worked with Futures First as an Interest Rates analyst. Sarthak is a B.Tech in Computer Science from Indraprastha University and has completed his MBA from Xavier Institute of Management, Bhubaneswar.

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