Over the past two weeks, the likes of Microsoft, Alphabet, Amazon and even Meta, Apple and Tesla have indicated a weakening demand environment that could last at least two quarters. Even Microsoft gave a cautious outlook despite strong performance.
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Migration to cloud has been at the vanguard of growth the past three years, but its pace has slowed considerably and is unlikely to return at the level it was post covid. As system integrators, the likes of TCS, Infosys and HCLTech get almost a fifth of their new business from the cloud services majors.
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“Much of the growth the industry has experienced over the last three years has been the migration to cloud and this modernization phenomena has slowed considerably and is unlikely to return at the level it was post-Covid,” said Peter Bendor Samuel, chief executive, Everest Group.
The IPPs (Indian pure plays) don’t directly get much revenue from the cloud hyperscalers. However, the hyperscalers are an important channel to market and much of the new scope work resides on their platform. At this time something in the order of 70% of their work sits in the cloud with around 20% of the new work coming from this channel, he added.
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“We are projecting a difficult end to this year and a further deceleration in the first and second quarter next year. We are hopeful that growth will start to accelerate in the third quarter,” said Bendor-Samuel.Generative AI
He added that despite the larger buzz around generative AI across the technology sector, it is unlikely to show meaningful contribution to business until late 2024. However, the cloud hyperscaler demand is likely to see some acceleration in the second half of 2024 (fiscal 2025), he added.
Gaurav Vasu, founder of technology research firm UnearthInsight, added that the bigger issue with hyperscalers giving a cautious outlook for the next two quarters- until March 2024 – is that these quarters are important for planning FY25 technology spends.
“Q1 and Q2 of FY25 also looks extremely difficult for the Indian IT services firm due to revenue and growth slowdown from hyperscalar and the SaaS ecosystem across US and Europe market ,” said Vasu. “While the current commentary will not have any impact on the existing revenue guidance given by the Indian pureplay IT services companies, it can cause revenue decline in Q1 FY25.”
According to UnearthInsight, around 20-30% of revenue for the IT services segment could come from the cloud hyperscalers, although the quantum and relative share in the total revenue mix could differ significantly for individual companies.
Yet, some of this shift toward cost optimization plans may benefit Indian players. According to HfS Research chief executive Phil Fersht, there is some more activity among the big tech majors, especially with cost pressures and demands to invest in the vibrant AI ecosystem.
“Accenture is commanding around $4 billion from this sector, Cognizant at least $1.2 billion and I would estimate Genpact at around $400 million as examples. In big tech, I would expect the Indian IT services to compete for 80% of the business, perhaps even more,” he added.