TCS, Infosys, HCL Tech, Wipro and Tech Mahindra: IT’s a chasm between management and investors

A relentless stock rout reflects an unanimously negative market sentiment on IT services stocks.

As another lacklustre earnings season from IT services companies concludes, the contradictions between managements and investors have already been starker.

From global industry leader Accenture, which reported results last month, to Infosys, which reported last week, managements remain steadfast in arguing that AI is a tailwind for the industry, judging by their commentary during earnings calls. They have maintained this view for nearly three years. That none of this optimism has translated into the financial numbers is another matter altogether.

Meanwhile, a relentless stock rout reflects an unanimously negative market sentiment on IT services stocks.

Investors, who initially drank the Kool-Aid after ChatGPT’s launch, are now nursing a hangover, demanding credible proof that AI will actually drive growth for IT services companies.

A week prior, Anand Mahindra, Tech Mahindra Chairman, tried to bridge this trust deficit while speaking at the company’s annual general meeting when he said, “The role of IT services will not diminish. It will change. In many ways, it will become more important.”

However, the evidence points in the opposite direction. IT services have occupied a relatively smaller share of global technology budgets over the past three years, and forecasts suggest that the trend is unlikely to reverse anytime soon.

The USD revenue growth estimate for next two years (FY26-28) for IT majors — TCS, Infosys, HCLTech, Wipro and Tech Mahindra — remains muted at a CAGR of 1.8, 1.9, 2.7, 0.2 and 3.8 per cent, respectively (Bloomberg consensus estimate).

Who is right? To answer that, investors should revisit the industry’s previous disruption and the transformation that followed.

The successful shift from the legacy-focused business to a digital- and cloud-led one in the previous decade is often cited as a proof to convince the naysayers this time. But a closer analysis of the transition indicates there are two sides to it.

The last 15-16 years can broadly be divided into four phases: FY10-15 (Phase 1), when outsourcing accelerated as global corporations cut costs after the global financial crisis; FY15-18 (Phase 2), when the digital and cloud disruption unsettled the industry and growth slowed; FY18-23 (Phase 3), when the transition was largely complete and digital business thrived (Covid notwithstanding); and FY23-26 (Phase 4), when AI has triggered the most disruptive technological shift yet.

While success of the industry in adapting to the structural technology shift in the previous decade is commendable, what also stands out is the impact it has had on growth and margins.