TCS' $1.5 Billion AI Revenue Fails to Impress: Why Investors Remain Cautious on Indian IT Services

The recent announcement by Tata Consultancy Services (TCS) that it generates $1.5 billion from artificial intelligence (AI) projects has been met with a lukewarm response from market experts. Despite this significant revenue, investors remain cautious on the long-term prospects of the Indian IT services sector, including key players like TCS.

Market Expert Insights

Dipan Mehta, Founder Director of Elixir Equities, expressed that unless large-cap technology firms demonstrate significantly higher and sustainable growth rates, they are unlikely to attract keen interest from investors. Mehta noted that a major technological trend like AI has had 'hardly any effect on the revenues and profits of the IT services industry' over his 30-year career.

Reasons for Cautious Outlook

Mehta's team has stopped tracking TCS and other large-cap IT firms closely due to this lack of growth momentum. The reasons for this cautious outlook include:

• Lack of significant growth rates: Despite the AI revenue, TCS' growth rates have not been impressive, leading to a decline in investor interest.
• Dependence on external factors: The IT services sector is heavily dependent on factors like rupee depreciation, base effect, and realization of revenues from previously won contracts, which can lead to short-term gains but not sustainable long-term growth.
• Reasonable valuations: While the valuations for these companies are reasonable, the decline in growth rates tempers their appeal, making them less attractive to investors seeking long-term growth.

Investment Advice

Mehta advised against expecting significant long-term gains from IT stocks. However, he suggested that remaining invested in software services companies could help capitalize on a potential bounce in the coming quarters. He clarified that these stocks can protect wealth or deliver returns in line with the broader market, but they are not 'great long-term growth stories' capable of creating substantial wealth from current levels.

Remember, this is a perspective, not a prediction. It's essential to do your own research and consider multiple viewpoints before making any investment decisions.