Goldman Sachs Sees Indian IT Sector Revival In FY25, Starts Coverage Of Six Indian IT Stocks

Goldman Sachs said that it sees a 9-10 per cent revenue growth from the financial year 2024-25 (FY25), even as in FY24 revenue growth is expected to be "muted" at 4 per cent year-on-year

Goldman Sachs has forecasted a resurgence of India's IT sector companies backed by pent-up demand for IT services and the impact of adopting generative artificial intelligence (AI) tech. In a report published on Tuesday, the Wall Street bank said that it sees a 9 per cent to 10 per cent revenue growth from the financial year 2024-25 (FY25), even as in FY24 revenue growth is expected to be "muted" at 4 per cent year-on-year. 

"Indian IT services companies have doubled their market share in the last 10 years," Goldman Sachs analysts led by Manish Adukia wrote in a note on Tuesday, as per a Reuters report. 

"Given the structural advantages of a large, skilled and low-cost workforce, coupled with a diversified geographical footprint, we expect Indian IT firms to continue gaining share," the report further said, adding, “We forecast a 9-10 per cent annual revenue growth for our India IT coverage from FY25, which is two times that of Goldman Sachs’ covered global companies in 2024...While our overall sector revenue growth is in line with consensus, we see company-specific divergence and are ahead of consensus on TCS and Infosys.”

“While India IT is trading at premium valuations versus its last 10-year average, we argue that the higher multiples are warranted as we view growth in IT/Tech spends as an industry perennial with a lower susceptibility to disruptions,” Goldman Sachs report further noted.

The report also said that historical data suggests periods of economic slowdown have been followed by elevated growth for Indian IT services companies, driven by increased enterprise outsourcing and pent-up demand. India's Nifty IT index is up about 8 per cent this year, looking to recoup some of last year's 26 per cent slump. The broader benchmark Nifty 50 index is up 7.2 per cent so far in 2023. 

Operating profit growth for the sector is expected to grow at a 12 per cent-15 per cent range over fiscal 2025-2026, faster than revenue growth, as the brokerage sees an expansion in margins for all the companies in its coverage.

The investment banking firm also started coverage on six Indian IT stocks, with "buy" ratings on top firms such as Infosys and TCS as well as the LTIMindtree, citing strong revenue growth expectations. It is more downbeat on Wipro and Tech Mahindra, recommending a "sell" on a weaker margin profile. Goldman Sachs also gave HCL Tech a "neutral" rating, seeing risks to near-term revenue growth. However, it viewed the company as "well-placed" in the medium term.