Generative AI and Deal Momentum to Drive IT Sector Growth: Nuvama

by | Nov 5, 2024 | 0 comments

The Generative AI and Deal Momentum are expected to witness significant growth in the next quarters, boosted by a pick-up in opportunities for generative AI, or Gen AI, and strong deal momentum, reports Nuvama Institutional Equities in its latest report. A positive outlook is being supported by several factors including the recovery of the BFSI (Banking, Financial Services, and Insurance) segment and the U.S. The recent cut in interest rates by the Federal Reserve is expected to spur discretionary spending in the IT sector. This blog delves into Nuvama’s views on the growth momentum in the IT sector that is expected and how these developments are expected to enable leading firms to take significant benefits.

The Power of Generative AI and Strong Deal Momentum

Nuvama states that deal momentum has been very strong in the IT sector for more than two years now. And it would be seen to drive further growth in the quarters ahead. The rapidly evolving technology that can create content, code, and much more is generative AI, which is emerging as a key driver in this landscape. According to Nuvama, Gen AI presents a “mammoth opportunity,” which can drive medium and long-term growth for IT companies with the ability to provide innovative and efficient solutions to their clients.

Nuvama Report states that apart from the service lines of traditional IT service, Gen AI can target specific client needs in those sectors, opening new ways to generate revenue. Using Gen AI tools has allowed companies to automate complex operations, drive operational efficiencies, and improve customer engagement things that are crucial for large, long-term contracts. Thus, IT firms that adopt Gen AI are already well-positioned to meet the increasing demands of their clients and expand into new service lines.

  • A Rebound in BFSI: The Road Ahead

Certainly, among the sectors that would drive IT growth is BFSI. For the most part, the BFSI space has shown signs of recovery after struggling on a rebound in discretionary spending. With the financial institutions opening their wallets further for technology and digital transformation, IT companies with this sector as a prime focus stand to gain quite significantly. According to Nuvama, despite a few revisions downwards as uncertainty in markets began surfacing, for the most part, that guidance went on to revised upwards in recent times as renewals have begun to witness demand in BFSI, most prominently in the U.S. market.

This is crucial because BFSI has always been a huge customer base for IT companies. Spent money from this space boosts the revenue but strengthens the IT market and gives scope for companies to counter other slowdowns in businesses as well.

  • Rate Cut by U.S. Federal Reserve

The latest cut of rate by the U.S. Federal Reserve is yet another reason that would give an impetus for the growth in the IT industry. The Fed reduced interest rates by 50 basis points to a range of 4.75-5% in September 2024. This will boost the U.S. economy, which will then spill over into the global IT sector. Reduced interest rates are usually accompanied by higher corporate spending because companies wish to seize opportunities presented by favourable interest rates. Because it is common in the United States, there is a great chance that high-tech industries will have further investment in digital solutions.

The other basis point cut in the November session is awaited in financial markets, according to CME Group’s FedWatch tool. This helps in building optimism in the IT sector because clients will obtain better visibility into the macroeconomic environment and may again turn to discretionary spending. Hence, this will further reduce the gap between deal flow and revenue growth.

Strong Q2 Performance and Positive Outlook for FY25

Many IT firms have promised Q2 FY25 performance with several firms exceeding growth expectations and maintaining stable margins. According to Nuvama, this recovery back into the positive end yet again reflects the ability and flexibility of the industry to perform in uncertain economies around the world. However, barring a few that couldn’t keep up given that most firms continue making investments in growth engines, most firms have maintained or hiked FY25 guidance as an indicator of optimism regarding the growth trajectory from the remaining part of the fiscal year.

At this juncture, when the IT sector is awaiting a seasonally softer Q3, deal signings are likely to slow down slightly because of the uncertainty surrounding the upcoming U.S. elections. However, management commentary and raised guidance have been positive for Nuvama, and it will continue on this upbeat track.

Workforce Growth and Stable Attrition Rates

It has also had significant headcount growth from within the IT sector, according to Nuvama’s report. The steady rate of workforce addition has been coupled with stable attrition levels and utilization is not too alarming. This means that the industry continues to witness strong demand for skilled talent to capitalise on business opportunities arising and believes that deals may start getting signed once business confidence improves.

Stable attrition rates can be seen as a more positive sign for IT firms as it suggests that these firms are retaining talent significantly better in a competitive market. Retaining talent is especially important for IT companies with respect to maintaining consistency in their projects, particularly in fields such as AI and machine learning.

Top Stock Picks: Nuvama Buy Recommendations

These companies have a “Buy” rating by Nuvama for many top IT stocks, including LTIMindtree, Infosys, TCS, Coforge, Persistent Systems, Mphasis, and HCL Tech. The companies will surely avail the growth in the IT space, especially with all the developments in Gen AI and BFSI. The brokerage remains hesitant on Tech Mahindra and Birlasoft, though for specific reasons.

  • Why LTIMindtree, Infosys, and TCS stand apart

These are large companies with a broad scope of capability and diverse customer bases. The investment into AI and digital transformation has been going active since these opportunities were outlined by Gen AI, and Nuvama supports that effort. This will lead IT majors as well during the quarter by maintaining deal momentum while the demand in BFSI will also continue to increase in subsequent quarters.

Some firms, like Coforge and Persistent Systems, have niche capabilities and verticals for high growth that include financial services and healthcare. The innovative solutions as well as the digital platforms provide an enabling factor for responding quickly to client needs. This is why they rank as top contenders for contracts that would last long-term.

Watch Out for The Future

However, as the forecast of the future is promising, there are still a few reasons to be concerned about. For instance, deal signing might experience some kind of slowdown for a while when U.S. elections occur. It creates some kind of uncertainty in corporate spending decisions. The current trend towards electric vehicles and environmental sustainability creates new technology requirements in the automotive sector. These can be both opportunities and challenges for IT companies.

Another area to monitor is how the regulatory settings in key markets in the US and Europe continue to shift, changing the nature of the deployment of the technology and practices of IT companies in data handling. With regulated industries such as healthcare and finance, clients are going to build trust in the businesses that proactively resolve their concerns about regulation and investments they make in compliance work.

Conclusion: IT Has a Bright Future Ahead

A read by Nuvama focuses on IT growth prospects, with the potential growth being led by deal momentum, gains from Gen AI, and a rebound in discretionary spending on BFSI. Another addition would be rate cuts by the U.S. Federal Reserve that may push clients to make more investments in digital transformation. However, there may be some headwinds still, but the overall positivity remains there as most of the IT firms have upgraded their guidance for FY25 and are better positioned to capture a larger share of the emerging digital economy.

Coming forward, Gen AI adoption and having a strategic focus on high-growth sectors, such as BFSI will be the key leader of the IT sector. Seeking investors wishing to capture this growth, can look towards the recommended stocks by Nuvama, such as LTIMindtree, Infosys, and TCS-all geared up for tackling present-day and future sector-related challenges.

Hence, at the very moment companies and investors are mobilizing their efforts to realize these unexploited virtues in the generative potential of AI and the sea-tides of digitalization sweeping everything in their ways, one can expect such momentum toward growth and change which IT industry may depict going into later quarters

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