Lack of AI Is Reducing India Software Stocks’ Heft as Tech Bets
Shares of India's vaunted IT outsourcing firms are facing a reality check, as global investors' rush into the artificial intelligence theme starts to leave pricey old-economy tech stocks behind.
Unlike counterparts in the developed world and China, Indian software makers including leader Tata Consultancy Services Ltd. have yet to make significant advances in generative AI. That combined with a still cloudy outlook for client spending may soon leave them looking like the tech bets of yesterday.
“Traditional software companies' earnings and valuations are at risk because their business models are not evolving with the times,” said Deven Choksey, managing director of DRChoksey FinServ Pvt.
A BSE Ltd. gauge of Indian software stocks has recently fallen through key support levels into a technical correction. Yet it's still trading well above its historical average earnings multiple after a yearslong rally in the nation's equity market.
Read More: Why Artificial Intelligence Is So Costly to Develop: QuickTake
India's IT firms enjoyed years of strong growth as the world's biggest corporations outsourced a vast amount of back-office work to save money, in a phenomenon known as getting “Bengalurud”. Those revenues have been slowing more recently as overseas customers cut spending to cope with challenging economies.
Meanwhile software and internet majors such as Microsoft Corp. and Alphabet Inc. have been investing billions to develop their own cloud offerings and large language models.
“Coding is getting left behind by computing in the tech investing world,” said Choksey. Indian firms need to reinvent their business models more quickly to embrace AI and deliver better software-as-a-service solutions and infrastructure like Amazon.com Inc.'s unit Amazon Web Services does, he added.
TCS last month reported its slowest annual sales growth in three years. Competitor Infosys Ltd. issued a tepid forecast for revenue growth of 1% to 3% in the year through March 2025 on a
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