TCS, Infosys, Wipro, TechM, HCL Tech: Alphabet's Q2 Cloud growth bodes well for domestic IT firms

Alphabet, erstwhile Google, has reported strong deal wins and better-than-expected growth in Cloud in the June quarter that bodes well for domestic tier I IT players namely Tata Consultancy Services (TCS), Infosys Ltd, Wipro Ltd, HCL Technologies Ltd and Tech Mahindra Ltd. Nuvama Institutional Equities said Alphabet's commentary was similar to that the Indian IT Services companies, which are reporting a shift in mix towards cost-takeout deals as clients are incrementally focussing on cost-saving initiatives. Looking at Alphabet's quarterly results, Nuvama feels the ongoing digitalisation and ‘cloudification’ should translate to strong revenue growth for Indian IT companies going ahead.

Alphabet reported $69.8 billion in June quarter revenue, which was ahead of Street’s $68.9 billion estimate. Operating margin for the technology major came in at 25 per cent, up 110 basis points sequentially, which was also higher than Street’s estimate of 23.5 per cent, thanks to cost saving initiatives taken by the company during last quarter. Cloud, growing 28 per cent YoY, led revenue growth yet again, , Nuvama said.

Operating margins for Alphabet improved by 110 basis points QoQ to 25 per cent, benefitting from tailwinds from delay in stock-based compensation reward from Q1FY23 to Q2FY23, increase in useful life of servers and lower depreciation (led by network equipment) – all this was partially offset by a $2.5 billion charge related to restructuring of workforce and office space.

Nuvama said cloud operating income came in positive for the first time as Google continued to drive growth and improved the business’ efficiency in tandem, Nuvama said.  Google is focusing on AI, by investing and integrating it with its offering such as Search and Cloud.

"Alphabet reported Cloud revenue growth of 28 per cent YoY—softer than the recent trend as clients are focusing on optimising cloud spends amid macroeconomic headwinds. Results pertaining to hyperscalers and commentary are similar to the Indian IT Services companies, which are reporting a shift in mix towards cost-takeout deals as clients are incrementally focussing on cost-saving initiatives. We believe some part of the transformation deals would be substituted by cost take-out deals in the near future while continued focus on digitalisation and ‘cloudification’ should translate to strong revenue growth for Indian IT companies in the medium to long term," Nuvama said.

Google Advertising business reported 7.6 per cent sequential degrowth (0.2 per cent YoY de-growth), with YouTube ads and Google Network declining the most. Alphabet is investing and integrating AI across its offerings. It launched ‘Bard’, its own AI conversational tool, about a month back and is enhancing the tool’s capabilities improve it further. Alphabet is not rated.