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So, what should we expect from TCS later this week and from Infosys early next week? Are we in for disappointment or surprise?
Kumar Rakesh: So, we will see the earnings season getting started later this week. We expect most of the companies to report flattish revenue growth sequentially, although we would continue to see YoY growth to improve for the sector. More importantly, we would expect that the management commentary should start turning a little more optimistic.
We are in the middle of budgeting cycle for enterprises for 2025 calendar year and we could start getting some early insight into what kind of budgets would we likely see in 2025. We do expect that the budget for this year would be higher than last year and the general optimism should start reflecting into the commentary as well.
Optimism will start reflecting because if Indian IT companies are losing because of AI, AI penetration has only increased, it is becoming more like a mainstay now. So, if the root problem was that this entire business model which was based on manpower and coding and it was charged on billing rates based on number of people who are working on it, that model has changed. If that model has changed, why do you think we should expect optimism?
Kumar Rakesh: So, the model is going to change, we still have very limited AI actually getting into but definitely, that is the trend that we would see in the coming years. But we will have to keep in mind there are a couple of things which are very different when we talk about AI, Gen AI use in case of enterprises. LLM models are still non-deterministic. So, there is a lot of scope of hallucination, which is not acceptable in an enterprise setup.
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They have not taken technology bets and that is something which we would see in the coming years as well. Coming to your point that the business model which was dependent on employees and that definitely is going to see a shift. It is fair to expect that the linearity of the business model is going to change and that is something which we already see some of the Indian IT services companies trying to prepare themselves for.
They have started building the accelerator platforms which are going to help them derive higher value addition to the deal and that is where we will start see some of the non-linearity. So, the two parts to it, one is the business model definitely is going to change, we will see non-linearity in it. At the same time, enterprises would need a lot of handholding where the Indian IT services companies will continue to get more demand.
Also, wanted to understand this whole debate about whether or not traditional IT services will try or will be able to rather adapt to the needs of AI or not, because AI is pretty much a work in progress, you do not know what shape it is going to take and how IT services or traditional IT services are going to fit into the piece.
Kumar Rakesh: That definitely is the case. We still are at a very early stage, difficult to call out who is a loser or a winner in this transition. So, the way we are looking at the Gen AI rollout is largely in three phases.
The first phase which I was referring to is the data modernisation. We prepare the groundwork for the Gen AI implementation, so that is the first leg of the cycle and there generally most of the companies will get an additional demand because data modernisation in some shape or form they have already been doing in their work, so that is incrementally positive for the entire industry.
Then, we get into the second phase where the Gen AI LLM model implementation will start happening. We currently do not have a lot of enterprise specific, domain specific LLM models, we will see a lot of those starting to come through in the next year or two and the implementation of those domain specific LLM models will start generating business for some of the IT services companies who are really strong and have good understanding of those domain and the LLM models, that phase will not be positive for all the companies, some of the companies will benefit from that.
And finally, the third phase will come, which will be the application development. Once these Gen AI tools and models have been rolled out and it is working on the data of the enterprises, they will start building applications on top of that to create use cases for these Gen AI tools and that is something which will be good for a few of the IT services companies.
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Again, we will continue to see a pyramid to build through this process in which some of the IT services companies will continue to see incremental demand, win out of this, and there would be few of the IT services companies which will fall on the sidelines and we will start seeing the impact. A little too early to call out who will specifically be the winner of this, but definitely a cycle which we are going to see to play out in the coming years.
Also, help us with your take on the segment wise performance because though you are optimistic about the growth within the IT space, initially it was the BFSI that led to some bit of a recovery, but which are the other segments that could help in the recovery and the demand within the IT space?
Kumar Rakesh: So, BFSI over the last couple of quarters, as you rightly mentioned, has started seeing a pickup. Now, over the last quarter or so, we have started seeing the discretionary demand to come back in the B&F, especially the banking and financial services space, and that is something which we expect through this year continue to pick up.
There is a lot of pent-up demand, the tech stack upgrade has been postponed for the last two years and there is a lot of work which needs to be done. Cloud migration had paused, so that is also something which has to pick up. So, we will continue to see that to continue through this year.
A couple of other verticals which we expect through this year to start contributing into the recovery, the first should be CPG retail and that is one vertical which slowed down because of the high inflation the companies were facing and the enterprise, the consumer demand also had slowed down, so that is another vertical which we see should start contribute to growth. We have already started seeing or the expectation is that the inventory restocking in the US should start happening and that essentially indicates that the confidence coming back into the consumer demand.
So, CPG retail is another vertical which we expect to start contributing in growth. The second vertical should be technology, which also had seen some bit of slowdown. We expect that also to start coming back in once the inflationary pressures are behind, we would expect technology vertical also to start driving recovery. These are the two verticals where we over the last few months we have seen the deal signings to have picked up.
So, there are some initial indications that the demand recovery should be around the corner in these two verticals. Manufacturing could take longer, especially the automotive manufacturing. There are long-term disruptions which are happening.
I happen to cover automotive sector as well. One of the reasons why automotive demand for engineering R&D demand from the automotive sector was strong was because of the push towards electrification.
But the way we saw last year, the demand for electric vehicles dramatically slowed down across multiple geographies and the government push for electrification also seems to be coming down now and hence the urge to electrify the platform for the automotive companies may not be as high as it was a year or so back and hence that adjustment to their capital spending could continue to happen and it could reflect on a weaker demand from the manufacturing and automotive space, so that could take a little longer to recover.
