Given the economic uncertainties and the timing of interest rate cuts, Fitch Ratings expects that clients will remain cautious this fiscal year and that the Indian information technology (IT) services sector will continue to be affected by subdued discretionary IT spending.
In its Indian IT Services outlook, Fitch Ratings says Tata Consultancy Services (TCS), Wipro and HCL Tech will have rating headroom because of robust free cash flow margins and a strong net cash position. Top IT companies have been winning digital transformation deals, and Fitch believes the sector's long-term growth will be supported by client spending on digital transformation, cloud migration and Artificial Intelligence (AI) despite short-term economic uncertainties.
"Digital transformation projects and cloud migration are trends which we expect will continue because they can improve clients' operating efficiency and resilience," it said.
Already techies with specialised skills are in demand and companies have been providing AI upskilling for employees in the age of AI.
Fitch too believes that AI has the potential to dramatically improve productivity and generate innovative solutions for clients. "Indian IT services companies are focusing on training their workforce in generative AI and AI skills. Adoption and spending growth are likely to be gradual, but we believe investment in AI will drive positive long-term growth for Indian IT services companies," it added.
"Organisations are seeing Cloud, Data and Gen AI adoption as essential for delivering superior customer experience, remaining cost competitive as well as be able to roll out differentiated products and services rapidly. There is a renewed focus on data strategy, data governance and use of analytics driven by the desire to leverage AI and GenAI," TCS CEO and MD K Krithivasan said recently in the company's first quarter (Q1 FY25) earnings conference call.
He said that Gen AI continues to hold major mindshare, and this is increasing by the day with newer models and techniques coming to the market almost on a daily or weekly basis.
In Q1 FY25, TCS deployed over 270 AI/GenAI engagements or are in various stages of progress. Its AI and Gen AI pipeline has also doubled in the quarter to $1.5 billion.
In Q1 FY25, Infosys' free cash flow was highest at $1.1 billion. Infosys CEO Salil Parekh addressing a press conference recently after announcing the company's June quarter results said that they continue to see strong traction from its clients for Generative AI programs delivered through Topaz. "Enterprises are focused on their own datasets that can be used in Generative AI large language models that create a huge impact for them," he said.