Topline growth remains the missing piece for IT sector recovery, says Wedbush’s Moshe Katri
Moshe Katri of Wedbush Securities said valuations have fallen below the seven-to-eight-times EV/EBITDA range that investors previously viewed as the floor, making it difficult to call a bottom. He added that upcoming IPOs of Anthropic and OpenAI could help improve sentiment towards the IT services sector.
Indian IT services stocks came under fresh pressure after Accenture cut its guidance, with Moshe Katri, Managing Director, FinTech & Tech-Enabled Services Investment Banking at Wedbush Securities, saying the sector's problems extend beyond the results of a single company.
According to Katri said, “The good news from what we have seen so far is that margins are looking better than expected for the industry. The negative so far is that we are yet to see any sort of topline growth acceleration or anything that's sustainable. That's the major issue here.”
Katri said the sector is unlikely to see a meaningful recovery until revenue growth improves. The IT index
He noted that valuations in the US have compressed sharply, with IT services companies that are delivering low- to mid-single-digit growth now trading at six to seven times EV/EBITDA, compared with 15 to 20 times seen two to three years ago. He added that these multiples apply to US companies and do not reflect the valuation premium enjoyed by Indian IT firms.
"Accenture is a bellwether name in general," Katri said. He noted that stocks across the sector fell between 5% and 15% after Accenture's earnings.
Katri said Wedbush previously thought 7 to 8 times earnings was the floor for Indian IT valuations — that floor has now broken. He said the market needs a sentiment shift, not just lower prices, before the sector looks attractive again.
"It's difficult to really call the bottom here," Katri said. He floated one possible turning point: initial public offerings from Anthropic and OpenAI, which he said could shift negative press attention away from IT services.
He added that companies need clear, distinctive AI-related work to justify investor interest right now. He pointed to two publicly traded examples: Fractal Analytics, an Indian company, and Innodata in the US, which he said is growing about 40%.
For the entire discussion, watch the accompanying video
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According to Katri said, “The good news from what we have seen so far is that margins are looking better than expected for the industry. The negative so far is that we are yet to see any sort of topline growth acceleration or anything that's sustainable. That's the major issue here.”
Katri said the sector is unlikely to see a meaningful recovery until revenue growth improves. The IT index
is down 24% so far this year.
He noted that valuations in the US have compressed sharply, with IT services companies that are delivering low- to mid-single-digit growth now trading at six to seven times EV/EBITDA, compared with 15 to 20 times seen two to three years ago. He added that these multiples apply to US companies and do not reflect the valuation premium enjoyed by Indian IT firms.
"Accenture is a bellwether name in general," Katri said. He noted that stocks across the sector fell between 5% and 15% after Accenture's earnings.
Katri said Wedbush previously thought 7 to 8 times earnings was the floor for Indian IT valuations — that floor has now broken. He said the market needs a sentiment shift, not just lower prices, before the sector looks attractive again.
"It's difficult to really call the bottom here," Katri said. He floated one possible turning point: initial public offerings from Anthropic and OpenAI, which he said could shift negative press attention away from IT services.
He added that companies need clear, distinctive AI-related work to justify investor interest right now. He pointed to two publicly traded examples: Fractal Analytics, an Indian company, and Innodata in the US, which he said is growing about 40%.
For the entire discussion, watch the accompanying video
Live stock market updates—follow our blog
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