A major takeaway from the latest quarterly numbers reported by companies including Tata Consultancy Services, Infosys, HCL Tech, and Wipro is that these companies are fast adapting to the technological changes. Each one of them not only have strategies to implement AI capabilities in their services deliverables but are also winning new deals because of that. This at a time when AI has started driving majority of the discretionary IT spending by clients – projects that focus on long-term benefits to the business and customers rather than short-term solutions to keep the business running.
While it is too early to declare a successful transition by Indian IT companies into the advanced AI field from the conventional cost arbitrage model, the fact that the deal pipelines of these companies continue to stay strong is noteworthy. What now calls for is certainty on the tariff related issues, which currently hinder long-term decision making.
AgenciesRising demand for AI-related services brightens 2nd half prospects, even as global and tariff headwinds persist
In addition, the impact of the new H1B visa rules seems to be more of short term in nature as Indian IT companies have been gradually increasing either local or near-shore hiring to reduce their dependence on work visas. Wipro, for instance, hosts nearly 80% of the workforce working for US clients locally. The flip side of this strategy, however, is more pressure on profitability since onsite projects tend to have lower margin. Levers such as improving employee utilisation, tilting services mix to customised solutions, and long-term client engagements to improve wallet share can be used judiciously to protect margins.
Among the top tier companies, some seem to have weathered the business challenges better going by the trend in the year-on-year growth of trailing 12 month (TTM) revenue in dollar terms. On this scale, HCLTech has shown a greater resilience though its TTM revenue growth has remained below 5% for the past three quarters. Infosys has staged a smart recovery by improving the TTM growth to 4.5% over the past two quarters from a low of 1.5% a year ago. On the other hand, TCS and Wipro show a higher pressure on the top line growth.
Given the deal momentum and the fact that barring TCS, other companies have reported improved hiring in the September quarter, the second half of the current fiscal year is likely to show better performance by the top tier companies. This coupled with weaker rupee may support their stock performance in the medium term.
