Infosys, Wipro, TCS, HCL Tech, TechM: What Alphabet's Q3 results suggest

In its Q3 results, the US-based Alphabet (erstwhile Google) said Cloud delivered 35 per cent YoY growth, the highest in the last nine quarters, reflecting accelerated growth in Google Cloud Platform (GCP) across AI infrastructure, generative AI solutions, and core GCP products. This is seen a positive cue for Indian IT firms such as Tata Consultancy Services Ltd, Infosys Ltd, HCL Technologies Ltd, Wipro Ltd and Tech Mahindra Ltd.

Nuvama said AI has become a key contributor to growth, and hyperscalers are aggressively investing in it to capture AI-led demand surge. IT companies, it said, are starting to see some green shoots in overall demand, although with no material pickup in discretionary spends yet. 

"We argue a pickup in cloud spending in FY25—after a modest FY24—will revive discretionary spending for IT Services in H2FY25 or FY26. Robust cloud growth of 35 per cent-plus (last seen in FY22) bodes well for Indian IT Services companies, and shall translate to an increase in overall growth," Nuvama said.

Alphabet reported 16 per cent growth in CC revenue at $88.30 billion, ahead of Street’s estimate of $86.5 billion. Operating margin decreased 10 bp QoQs to 32.3 per cent, beating Street’s estimate of 31.4 per cent. 

Nuvama noted that the Alphabet management is focused on balancing AI investments with the cost initiatives required to support these initiatives. The management highlighted continued growth momentum in advertising and noted that subscriptions revenue may face a headwind in Q4FY24.

IT stocks to watch
Among domestic IT stocks, Kotak said many stocks have crossed the Covid peak in valuation multiples, even as growth is nowhere near the highs of FY2022-FY23. The margin of safety has reduced after the 5-68 per cent rally in stocks in the past six months. 

"Infosys and TCS offer moderate upside and are our key picks. Both companies have robust engines to participate in discretionary and cost take-out agendas without sacrificing profitability. Coforge is our key pick among mid-tier names, with a promise of material revenue acceleration backed by margin expansion," it said.

"TechM is progressing well on the turnaround journey, with surprising defense of revenues in the telecom vertical," the brokerage said.

Kotak said the Q2 results reaffirmed a steady uptick in growth, led by financial services. At the same time, strength was not enough to call for a normalisation of growth rate. 

"Mid-tier companies demonstrated resilience in growth, large companies were steady and ERD decisively slowed down. Valuations are stiff and do not offer margin of safety in many. Within the sector, Infosys, Coforge and TechM could outperform," it said.

JM Financial said there are early signs of those returning. Infosys reported double digit growth in short cycle deals in the pipeline. This, if sustains, will be positive for the sector in general and Infosys in particular, it said.

"Near-term however, paucity of triggers could keep large-cap stocks range-bound. We prefer to stay with players with good earnings visibility (Infosys, TechM) or valuation comfort (Wipro). Mid-caps, on the other hand, outpaced larger peers again, further widening valuation gap, justifiably so. PSYS is our top mid-cap pick. Structural narrative in Auto ER&D (KPIT/Tata Tech) stays despite transitory headwinds," it said.