Nomura: Indian IT primed for AI, global investors show cautious optimism

The report also highlighted that Indian IT companies' preparedness to ride the generative AI wave is very high. "Indian IT companies are much better prepared today to ride the generative AI wave compared to what they were prior to the last wave, which was the cloud wave," the report noted.

Among large caps Nomura has seen investor interest in Infosys, TCS, Tech Mahindra, HCLTech, and Cognizant. However, Wipro doesn't figure on the list.

In the mid-cap space, Coforge and Persistent Systems are two preferred picks of foreign investors.

Nomura answered three key questions surrounding the IT industry's performance.

On investor concerns about the current demand cycle and how the Indian IT industry is placed, Nomura said the discretionary demand continues to be hit, particularly in the BFSI space.

However, Nomura believes the companies will continue to lower overall costs given the high inflation in the US and the labour shortages.

Nomura believes growth will meaningfully bounce back. They estimate 8.2% for next year for large cap, which compares with just 3.2% in the current year. So growth will bounce back but on a low base.

The expectation is margins may expand, but not to the extent that the Street was anticipating a year ago. Nomura expects margin expansion of about 50 basis points excluding Tech Mahindra.

In the case of Tech Mahindra, it could be a lot higher because of the low base and initiatives taken by the company's new CEO.

While companies are rigorously preparing for the new wave, Nomura expects generative AI’s adoption to increase significantly only gradually over 18 to 24 months.