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Cloud may not take Indian IT service provider stocks to the moon

The entire consensus optimism seems to be baked into the longer-term even as near-term revenue trajectory (FY20-23) remains constant or lower, ICICI Securities' analysts said in a report. (iStock)Premium
The entire consensus optimism seems to be baked into the longer-term even as near-term revenue trajectory (FY20-23) remains constant or lower, ICICI Securities' analysts said in a report. (iStock)

  • While cloud services evoke near-term optimism, the long-term visibility on revenue generation from any technology change is limited, say analysts at ICICI Securities Ltd
  • The consensus view is that cloud has taken precedence in IT cos' spends due to the pandemic-led explosion in online activity

Indian IT services providers are gung-ho on the improving prospects of cloud migration technology, and so are investors in their stocks. Experts have indicated that they see increased traction in this segment in a post-covid era. Cloud migration refers to moving digital data and applications to a platform that offers customers greater flexibility and reduced maintenance cost.

At a recently held IT investor forum by HDFC Securities Ltd, the management of technology giant Tata Consultancy Services Ltd said that the percentage of large enterprises that were on public or hybrid cloud was only 17-20% at the start of FY21. However, post-pandemic, it is at 30-35%. At the same forum, peers Infosys Ltd and Wipro Ltd said they are seeing increased demand for their cloud offerings.

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Tier-II IT companies Mindtree Ltd and Corforge Ltd are also betting on increased revenue from cloud transformation. The Coforge management said it has closed multiple large deals in the $20 million-plus bracket that are focused on cloud and infra services. Coforge expects this service line to significantly lead its growth in the next two years.

Similar outlook
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Similar outlook

But analysts at ICICI Securities Ltd have a note of caution. They said despite the near-term optimism over cloud services, the long-term visibility on revenue generation from any technology change is limited.

A similar euphoria around block chain and internet of things over FY15-18 had failed to gain scale and contribute meaningful revenue over the medium term, they said in a report on 4 March. “In the current context, this makes us more cautious as the entire consensus optimism seems to be baked into the longer-term even as near-term revenue trajectory (FY20-23) remains constant or lower."

Gartner’s IT spending outlook and analysts’ estimates for IT services companies for 2021 and 2022 are broadly similar to where they were pre-covid, the analysts pointed out.

Of course, ICICI’s is more or less a minority view. But it’s worth noting that revenue guidance by some global companies, such as Accenture Plc, do not factor in a surge in overall growth, even though their cloud services business is doing well.

The consensus view, more or less, is that cloud has taken precedence in spends among IT clients due to the pandemic-led explosion in online activity.

Analysts at domestic brokerage house Edelweiss Securities Ltd said increased adoption of cloud technology by customers presents a $1 trillion opportunity for the global tech services industry. For global outsourcing, this could translate into $250 billion worth of revenue and approximately incremental revenue of $175 billion for Indian IT services. Edelweiss estimates that this could result in doubling of export revenues from the existing $150 billion or a five-year revenue CAGR of 16-17% for Indian IT firms. CAGR is short for compound annual growth rate.

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