SaaS to spur revenue growth for IT firms in 2024- Analysts

SaaS to spur revenue growth for IT firms in 2024: Analysts

Optimism over SaaS (software as a service) companies will drive revenue growth of Indian IT firms in 2024, while ER&D (engineering and research and development) work will remain a bright spot, according to analysts.

Indian IT players have ‘sell-to’ and ‘sell-with’ partnerships with a number of global SaaS companies, ICICI Securities said in a note. Recent results of such global companies and commentaries of their managements indicate that they “exhibit a texture of stable demand, and even improvement”.

“We see SaaS players being early beneficiaries of Gen AI, with follow-on effects on IT services industry with a time lag,” said the ICICI Securities note. Kotak Institutional Equities, in a note, said, “ER&D remains a bright spot. Enterprises in manufacturing-led verticals, such as automotive and aerospace, have historically lagged in tech adoption but are now catching up.”

Analysts at Kotak highlighted IT-OT (operational technologies) conveorgence and smart manufacturing as the key themes driving increase in spends by clients to make their shop-floor operations more efficient.

“Automotive clients are undergoing technology transition and investing in electrification, connected and autonomous vehicles. Sustainability is another theme where clients are increasingly allocating spends to make their businesses more environment friendly. Indian engineering service providers are benefiting from elevated spends by clients across multiple themes,” the said.

In another note, Kotak Institutional Equities said, “Spending on Generative AI may not be a significant growth driver for most services firms and software firms. Growth projections for CY24 by major software vendors can provide an early indication.” For example, it said, Adobe’s guidance for CY24 indicated only a modest boost to higher-priced software subscriptions that include Gen-AI capabilities.

Peter Bendor-Samuel, CEO, Everest Group, said, “This is an encouraging sign as tech spending tends to lead tech services spending. However, some caution is warranted; we have seen customer sentiment to be volatile over the last three quarters and this may be another false positive.”

Bendor-Samuel added, “Another factor warranting caution is that we are yet to see a significant rise in new adoption. It is new adoption where tech services firms make money. Still, all in all a positive sign.”