Citi continues to maintain a cautious stance on Indian IT stocks, with Surendra Goyal highlighting multiple structural challenges that, in his view, are making the sector’s growth environment increasingly difficult. Speaking in a recent interaction, Goyal underscored that the brokerage’s conservative outlook is not new but rooted in concerns that have persisted for several years.
“We have been negative for a very long time. We have generally had a cautious view of the industry, been four years plus,” Goyal said, adding that the core issues weighing on the sector “are still valid in our view.” He pointed to rising fragmentation in the market as one of the key structural shifts. According to him, “the level of fragmentation in the market is very high,” with smaller companies gaining ground rapidly. “Over the last few years, we have seen the smaller companies grow at a much faster pace and gain relevance. And they are competing very aggressively in the market today,” he noted.
Another major area of concern, Goyal said, is the evolving impact of artificial intelligence. While AI is widely seen as a growth driver, he believes its near-term implications are more complex. “AI, we are seeing productivity… from customers on existing work. And then there is some new revenues also kicking in, but at this point of time, that is not able to fully offset,” he explained. This suggests that while AI-led opportunities are emerging, they are yet to meaningfully compensate for the pressures on traditional revenue streams.
Goyal also highlighted the growing influence of Global Capability Centres (GCCs), which he believes are intensifying competition for IT services firms. “The whole GCC phenomenon… feeds into the same enterprise IT spending,” he said. When combined with other headwinds, this is resulting in “a lower growth environment with a lot of competitive intensity.”
The elevated competition is also having a direct bearing on profitability. Goyal pointed out that even favourable currency movements have not translated into stronger margins. “If you had asked anybody a year back that the rupee will be at 95, what margins will IT companies make? I’m sure people would have put a number much higher than what has come through,” he said. This gap between expectations and reality, he argued, clearly illustrates how “competitive intensity is also very high,” keeping margin expansion under check.
Adding to Citi’s cautious stance is the valuation gap between Indian IT firms and their global peers. Goyal noted that despite similarities in business models, global companies are trading at relatively lower multiples. “You can look at some of the global peers. Those business models are not too different from these companies. They are trading at like high single, low double digit valuations versus Indian IT still trading at a relatively much higher multiple,” he said.
Taken together, these factors make it difficult for Citi to take a positive view on the sector at present. “All of those reasons are intact, which is why it’s difficult to have a constructive view on the sector at this point of time,” Goyal said.
(Disclaimer: The above article is meant for informational purposes only, and should not be considered as any investment advice. ET NOW DIGITAL suggests its readers/audience to consult their financial advisors before making any money related decisions.)
