In its third quarter results, US company Alphabet (formerly Google) said cloud delivered 35% year-over-year growth, the highest in the last nine quarters, reflecting the accelerated growth of Google Cloud Platform (GCP). in AI infrastructure, generative AI solutions and GCP core products. This appears to be a positive sign for Indian IT companies such as Tata Consultancy Services Ltd, Infosys LtdHCL Technologies Ltd, Wipro Ltd and Tech Mahindra Ltd.

Nuvama said AI has become a key contributor to growth and hyperscalers are investing in it aggressively to capture the AI-driven surge in demand. IT companies, he says, are starting to see some green shoots in overall demand, although there is no significant recovery in discretionary spending yet.

“We believe a recovery in cloud spending in FY25, after a modest FY24, will revive discretionary spending on IT services in the second half of FY25 or FY26 Robust cloud growth of over 35% (last seen in FY22) bodes well for Indian IT services companies. , and will result in an increase in overall growth,” Nuvama said.

Alphabet reported 16 percent growth in CC revenue to $88.30 billion, ahead of the Street estimate of $86.5 billion. Operating margin declined 10 bps quarter-on-quarter to 32.3 percent, beating the Street estimate of 31.4 percent.

Nuvama noted that Alphabet management is focused on balancing AI investments with the cost initiatives needed to support those initiatives. Management highlighted continued growth momentum in advertising and noted that subscription revenue could face challenges in Q4FY24.

IT Stocks to Watch
Among domestic IT stocks, Kotak said many stocks have crossed the Covid peak in terms of valuation multiples, even though growth is nowhere near the highs of fiscal 2022-23. The margin of safety has narrowed after stocks rose 5 to 68 percent over the past six months.

“Infosys and TCS offer moderate upside potential and are our top picks. Both companies have robust engines to participate in discretionary and cost reduction programs without sacrificing profitability. Coforge is our key pick among mid-tier names, with promise of significant revenue acceleration supported by margin expansion,” he said.

“TechM is progressing well in its turnaround process, with surprising revenue defense in the telecom sector,” the brokerage said.

Kotak said the second quarter results reaffirmed a steady rise in growth, driven by financial services. At the same time, the strength was not enough to demand a normalization of the growth rate.

“Mid-sized companies have shown resilience in growth, large companies have been stable and ERD has slowed down significantly. Valuations are sticky and do not provide a margin of safety for many. Within the sector, Infosys, Coforge and TechM could outperform,” he said.