Several factors indicate an upward trend in the coming years, including shifts in client behaviour, increased technology investments, and the rise of new technologies such as Generative AI (GenAI).
Key verticals like BFSI, healthcare, and manufacturing are expected to drive this growth. As interest rates in the US stabilize, capital-intensive sectors will likely reallocate funds towards IT services, supporting the expansion of digital infrastructure and modernization efforts.
Global Capability Centers (GCCs), which have evolved from cost-saving hubs to strategic IT players, are now playing a pivotal role in the allocation of technology dollars.
These centres, especially for Fortune 500 companies, are taking on more significant responsibilities, leading to a shift in how service vendors operate. Despite this shift, service vendors remain vital for their ability to offer speed, flexibility, and domain expertise, particularly in periods of rapid technological advancement.
They are well-positioned to benefit from the next wave of demand as clients turn to vendors to scale operations and implement next-gen solutions.GenAI is another major growth driver. Currently in its innovation phase, similar to the cloud computing wave from 2014-2019, it is expected to see widespread adoption over the next 18-24 months.As enterprises transition from Proof of Concept (POC) projects to full-scale GenAI deployments, IT service providers will gain new revenue streams from AI model training, cloud migration, and maintaining large language models (LLMs).
Although automation may result in some revenue deflation in low-level coding and business process outsourcing (BPO), the overall impact of GenAI is expected to fuel long-term growth for service vendors.
To navigate these evolving trends, the report introduces the IMPACT framework for stock picking. This framework evaluates companies based on industry exposure, margin expansion levers, platform and ecosystem partnerships, automation integration, client strategies, and technology readiness.
By focusing on these factors, investors can identify stocks poised to benefit from both short-term and long-term technological shifts. As the IT services sector moves towards recovery, understanding these dynamics will be crucial for capitalizing on emerging opportunities and driving future growth.
HCL Technologies: Buy | LTP Rs 1,805 | Target Rs 2,200 | Upside 21%
HCL Technologies is an attractive investment option in this sector given its well-diversified portfolio, with significant exposure to healthcare and manufacturing sectors, which are expected to drive all-weather growth.
Its strong partnerships and investments in next-gen platforms like cloud modernization position it well for the upcoming surge in GenAI adoption.
We believe company’s go-to-market (GTM) strategy, which combines its IT Services and ER&D business offerings, gives HCL Tech an edge over its peers. We expect a CAGR of 7.2%/9.6% in USD revenue/INR PAT over FY24-26E.
Coforge: Buy | LTP Rs 6,874 | Target Rs 8,100 | Upside 17%
Coforge’s exposure to BFSI should enable it to participate in demand recovery, and a strong TCV and order backlog also indicate a robust near-term growth outlook.
We believe it could participate in the pre-GenAI-led data modernization spending through its offerings & could extract margin synergies from Cigniti integration. We expect 22% PAT CAGR over FY24-26E.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
