Nomura sees IT sector growth improving but perception on AI remains a hurdle

Revenue growth for Indian information technology (IT) companies is poised for a marginal improvement in the upcoming financial year, though negative investor perception surrounding artificial intelligence (AI) remains a challenge, according to a recent Nomura report. In an interview with CNBC TV18, Abhishek Bhandari, Executive Director for Technology and Internet at Nomura, detailed the firm's outlook, projecting that large-cap IT firms could see dollar revenue growth accelerate to 4.5% from the current 3%, with mid-caps continuing to outpace their larger peers.

Addressing the impact of currency fluctuations, Bhandari explained the short-term benefits of a depreciating rupee. "The math is typically 1% depreciation in rupee yields around 25 to 30 basis point improvement in margins for the IT sector," he stated. However, he clarified that this is a temporary advantage, as these gains are eventually passed on to clients over the long term. For the next financial year, Nomura forecasts the rupee to average around ₹89 to the dollar, compared to ₹87.5 this year, leading the firm to bake in a nearly 30 basis point margin improvement for large-cap companies.

The primary pushback from investors, Bhandari noted, is centered on the perception of the IT services industry as an 'AI loser'. "Globally the big narrative going on in the tech space is identifying winners versus losers… and IT services in general are perceived to be quote unquote AI losers because they haven't really participated in the AI wave so far," he said. This perception has been compounded by revenue deflation from accelerated discounting that firms are forced to offer customers.

Despite this, Bhandari argued that IT services businesses are historically predicated on technology changes and ultimately benefit from them. He believes the current cycle will be no different, attributing the delay to the rapid pace of innovation in AI. With new and better models emerging constantly, enterprises find it difficult to anchor themselves to a single AI stack, thus postponing large-scale spending. "It's more of a timing issue. The delay actually has been longer than expected because the winners in AI is still not identified," Bhandari explained.

Reflecting this evolving landscape, Nomura has adopted a more positive stance on the sector compared to the previous year. Bhandari highlighted emerging evidence that is shifting this perspective. "We are already seeing evidences of the POC (proof of concept) projects moving to point solutions which is generally the start of AI spending," he observed. He also pointed to commentary from global IT giants like Cognizant, which are indicating the commencement of smaller AI projects.

Ultimately, Nomura anticipates that the large cloud companies that have invested heavily in AI infrastructure will need to start monetising those investments. This will inevitably drive spending on the application layer, where Indian IT services companies are well-positioned to participate. "The narrative on AI is likely to get better from the IT services point of view," Bhandari concluded, signaling a cautiously optimistic outlook for the sector.