Nuvama reports positive news for IT stocks, highlighting improved growth trajectories in Q4 for major hyperscalers such as Amazon, Azure, and GCP (Google Cloud Platform).
Amazon’s Q4 results exceeding expectations have led domestic brokerage Nuvama Institutional Equities to express optimism about the growth in the cloud sector benefiting Indian IT firms. According to Nuvama, all three major hyperscalers – Amazon, Azure, and GCP (Google Cloud Platform) – have displayed an improved growth trajectory in this quarter. This positive trend is attributed to a slowdown in clients’ cost-cutting measures, and the revival of overall growth is driven by increased demand in artificial intelligence (AI).
The statement suggests that, although it is still in the early stages, there are positive indications of a resurgence in discretionary spending, particularly in the Cloud sector. The expectation is for an increase in cloud spending in the year 2024, following a relatively modest spending trend in the calendar year 2023 (CY23).
This anticipated uptick in cloud spending is seen as a factor contributing to higher overall growth in the fiscal year 2025 (FY25) compared to the preceding fiscal year, FY24.
In Q4FY23, Amazon reported robust financial results with a revenue of $169.9 billion, reflecting a substantial year-on-year (YoY) increase of 13.9%. This surpassed the Street’s estimate of $166.2 billion. Additionally, the operating income exhibited remarkable growth, soaring by 382.6% YoY to reach $13.2 billion, surpassing the Street’s projection of $10.5 billion.
Amazon’s revenue experienced a significant 13.2% year-on-year (YoY) growth, marking a 100 basis points (bps) increase quarter-on-quarter (QoQ). In the fourth quarter, Amazon Web Services (AWS) contributed over $1.1 billion in incremental revenue, bringing its annualized revenue run rate to $100 billion. According to Nuvama, the management perceives a diminishing impact of cost optimization, which is expected to translate into growth in the cloud business.
Nuvama reported that Amazon has provided guidance for net sales in Q1FY24 (March quarter) ranging from $138 billion to $143.50 billion. This guidance implies a year-on-year (YoY) uptick in the range of 8% to 13%. Additionally, similar to other hyperscalers, Amazon anticipates an increase in capital expenditure (capex) for the fiscal year 2024 (FY24). This growth in capex is primarily attributed to heightened infrastructure spending aimed at supporting the growth of its AWS business. It includes additional investments in generative artificial intelligence (AI) and large language models.
In their Q3 review, Kotak Institutional Equities noted that the growth rate for FY2025 is influenced by factors such as the Q4 exit rate, recovery in discretionary spending, and revenue generated from new mega deals. These elements are expected to play a crucial role in determining the overall growth trajectory for the fiscal year 2025.
The statement suggests an optimistic outlook for the Indian IT industry, expecting a growth rate to increase from 4-5% in FY2024 to 6-7%. Key players like Infosys, TCS (Tata Consultancy Services), and HCL Technologies are anticipated to achieve a growth rate of 2-3% in FY2025. TCS and HCL Tech are expected to outperform the industry, benefiting from the scaling up of large deals. Infosys is projected to grow at 6.6%, with some impact due to a weak exit. The FY2025 growth outlook is subject to uncertainty, contingent on factors that are yet to be clarified.
The brokerage has identified Infosys as its preferred stock pick, expressing interest in TCS as well. Additionally, in the midcap space, Cyient is favored by this brokerage.
Kotak acknowledges that some IT companies have indicated positive developments, particularly in the financial services sector. However, at a broader level, the brokerage notes that discretionary spending has not seen significant improvement, as per the feedback from various IT companies.
The brokerage points out that the predominant focus of enterprises, clients of IT services companies, across most sectors is on cost-reduction priorities. According to their analysis, many enterprises have set cost-savings targets extending into 2024. This scenario raises concerns about a substantial recovery in discretionary spending, at least in the first half of the calendar year 2024. These trends and observations have been outlined in the brokerage’s note on the IT spending outlook for the calendar year 2024.
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