Brokerage firm Motilal Oswal Financial Services believes that the moderation in cloud growth of key hyperscalers intensifies near-term uncertainty for the technology sector.
Hyperscalers are large cloud service providers. They provide services such as computing and storage at an enterprise scale. Amazon, Microsoft, Google, IBM, etc. are the major hyperscalers in the world. Any slowdown in the revenue or guidance at hyperscalers is viewed as negative for IT services growth.
As per the brokerage firm, hyperscaler growth (AWS, Azure, GCP) is an important forward-looking metric for demand at IT services companies, given the scale of enterprises spending on cloud migration.
In a report on February 9, the brokerage firm pointed out that the cloud business growth of some hyperscalers (Amazon, Microsoft, Google, etc.) ebbed for the fourth straight quarter. Moreover, their management indicated a further slowdown and a shift in focus towards cost optimization projects from enterprises due to high macro uncertainty.
"The cloud growth across hyperscalers continues to taper off from its peak seen in Q4CY21. The slowdown in demand is a function of reprioritising enterprise spending towards core operations amid the challenging macro environment," said Motilal Oswal.
However, the brokerage firm added that the deal pipeline remains healthy and robust with a few customers planning to go slow with the migration and have committed to staying for a long-term horizon.
"We believe the Cloud migration activities have taken a temporary pause before it starts to accelerate further going ahead. Despite the four consecutive quarters of slowdown, the IT services companies have not witnessed any material weakness in delivering Q3 performance," said the brokerage firm.
Motilal said as the businesses continue to rely on technology, both for driving incremental revenue and optimizing costs, the demand for Indian IT services should remain buoyant despite an uncertain macro environment.
Digital transformation initiatives will continue to drive demand for IT services companies. Improved utilization, offshoring, fresher additions, lower attrition, and lower reliance on sub-contractor expenses remain the key margin levers, it said.
"We remain positive on the sector led by sustained long-term demand. We continue to prefer TCS, HCL Tech, and Infosys in the tier-I IT space and Cyient, Zensar and L&T Technology Services among tier-II players," said Motilal Oswal.
Disclaimer: The views and recommendations given in this article are those of the broking firm. These do not represent the views of MintGenie.