Katri noted, “The positive takeaway from what we’ve observed so far is that industry margins appear better than anticipated. However, the concerning aspect is that we have yet to witness any significant acceleration in topline growth or anything sustainable. This remains the main issue.”
Katri mentioned that without improved revenue growth, the sector is not likely to see a substantial recovery. The IT index has dropped 24% this year.
He observed that valuations in the US have sharply declined, with IT service firms showing low- to mid-single-digit growth now trading at six to seven times EV/EBITDA, down from 15 to 20 times seen two to three years ago. He pointed out that these multiples apply to US firms and do not account for the valuation premium enjoyed by Indian IT companies.
“Accenture
serves as a benchmark in the industry,” Katri noted, adding that stocks across this sector fell between 5% and 15% following Accenture’s earnings release.
Katri remarked that Wedbush previously viewed 7 to 8 times earnings as the baseline for valuations in Indian IT; however, that baseline has now been breached. He stressed that the market requires a shift in sentiment, not merely lower prices, for the sector to regain its appeal.
“It’s challenging to determine a bottom here,” Katri stated. He suggested one potential turning point could be initial public offerings from Anthropic and OpenAI, which he believes may help divert negative media focus from IT services.
He added that companies must demonstrate clear, distinct AI-related initiatives to capture investor interest currently. He highlighted two publicly traded examples: Fractal Analytics, an Indian firm, and Innodata in the US, both experiencing approximately 40% growth.
For the full discussion, watch the accompanying video
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