News

Published: October 29, 2024
Updated: October 29, 2024

Alphabet's Strong Q3 Cloud Growth: A Boon for Indian IT Giants like Infosys, TCS, and HCL Tech

Cloud Growth Sparks Optimism for Indian IT Companies

Alphabet's impressive 35% year-on-year growth in its cloud segment for Q3 has sparked optimism for Indian IT firms. This performance is seen as a potential driver for companies like Infosys, Tata Consultancy Services (TCS), HCL Technologies, Wipro, and Tech Mahindra, as demand for cloud and AI services rises. Brokerage firm Nuvama notes that hyperscalers, including Alphabet, are aggressively investing in AI to capture the growing demand, and this trend is expected to gradually benefit the Indian IT services sector.

Projected Increase in Cloud and Discretionary Spending

Nuvama forecasts a rebound in cloud-related discretionary spending in fiscal year 2025 (FY25), as companies focus on infrastructure to meet AI-led demand. According to the brokerage, Indian IT firms may experience renewed growth in the second half of FY25 or FY26 as clients allocate more resources to discretionary projects. This comes after a modest growth period in FY24, suggesting a promising outlook for tech firms with strong cloud capabilities.

Infosys and TCS: Top Picks for Growth Potential

Among Indian IT stocks, Kotak highlights Infosys and TCS as key players with moderate upside potential. Both companies have demonstrated an ability to handle cost-efficient, high-value projects without compromising on profitability. This is crucial as businesses prioritize strategic spending in the face of economic uncertainties. Mid-tier company Coforge also receives attention for its potential revenue acceleration, supported by margin growth, while Tech Mahindra is noted for its progress in stabilizing revenues in the telecom sector.

Alphabet’s Broader Financial Performance and Strategic Moves

Alphabet reported a robust Q3 with constant currency (CC) revenue growth of 16%, reaching $88.3 billion—outperforming market expectations. Despite a slight dip in operating margin, Alphabet’s results reinforce a balanced approach between AI investments and cost management. However, the company anticipates some revenue challenges in its subscription services for the final quarter of FY24.

Rising Valuations and Limited Margins of Safety for IT Stocks

Kotak warns that many IT stocks have seen valuations soar above pre-pandemic levels, yet current growth lags behind the highs of FY22-FY23. With valuations on the rise, margin safety has diminished, prompting investors to weigh future growth carefully. Infosys, TCS, and Coforge emerge as Kotak's recommended picks, while Tech Mahindra’s telecom resilience is also highlighted.

Alphabet’s robust cloud growth in Q3 is a promising signal for Indian IT companies, potentially leading to increased investment in cloud and AI solutions. While current valuations reflect market optimism, Infosys, TCS, and select mid-tier companies remain well-positioned to leverage this opportunity. Accordingly, Indian IT firms could see a significant upswing in growth in FY25 and beyond as they align with evolving client demands in the cloud and AI sectors.