Short Call | Can IT service providers capture the BFS resurgence wave? Sobha, Praj Industries in focus

Short Call

Cloud, data, and AI are set to lead the charge for a turnaround in the IT sector causing the banking and financial services (BFS) vertical's revenue to normalise by FY26. The key driver is a fresh wave of discretionary spending from US BFS firms.  Kotak Institutional Equities highlighted this momentum in its November 22 report.

Banks are modernising legacy systems to stay competitive. Citi retired 450 applications this year, while Franklin Resources unified investment tech on a single platform. Morgan Stanley saw double-digit tech spending growth, and Goldman Sachs, despite cost-cutting, aims to invest in engineering and technology platforms.

However, not all firms are sprinting ahead. Wells Fargo, TD Bank, and Discover are some of the banks that continue to have fixing regulatory and compliance issues as their top priority. TD Bank, for instance, plans to spend $500 million annually on compliance upgrades by CY2026 after a major regulatory fine.

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Regionally, while US banks are bullish, Europe faces mixed trends. UBS is aggressively modernising with investments in cloud and AI, including the deployment of 50,000 Copilot licenses, the largest such rollout in the industry. On the flip side, firms like Credit Suisse are scaling back in some areas, citing post-merger cost efficiencies.

Generative AI is also gaining traction, albeit slowly. Visa is leveraging AI to enhance productivity across engineering, accounting, and client services, while Moody's is still developing governance frameworks.

Looking ahead, CY2025 tech budgets will be crucial. For IT service providers, the message is clear: align closely with BFS priorities or risk missing out on a resurgence driven by modernisation and tech-enabled efficiency.

Sobha (Rs 1,615, +6.5%)

International brokerage Investec initiated coverage with a 'buy' tag, seeing a potential upside of 42 percent.

Bull Case: Investec expects an 18 percent CAGR pre-sales growth over FY24-FY27 considering Sobha's strong project pipeline. The brokerage added that if the realty player decides to monetizing its land reserves and use incremental cash flows to expand its joint development business, it could enhance profitability. Further, the firm's strong project pipeline will drive pre-sales.

Bear Case: A key risk for the firm is its large and concentrated land bank, which has depressed return ratios; furthermore, there are no imminent monetisation prospects from large land parcels such as Hoskote, as per Nuvama Institutional Equities. Another overhang on the stock could be approval delays, which would lead to slower new sales.

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Praj Industries (Rs 781 | +15.5%)

Aims to triple revenues by 2030

Bull Case: Praj Industries is strategically positioned to benefit from the global shift towards sustainable energy and materials. With its expertise in bio-based technologies and a clear focus on high-growth areas like sustainable aviation fuel, biopolymers, and energy transition, the company could see robust demand domestically and internationally. Supportive government policies, net-zero commitments, and strategic partnerships further bolster its potential to achieve its ambitious revenue targets by 2030.

Bear Case: Despite its ambitious goals, Praj Industries faces significant risks, including execution challenges in new markets and intense competition from global players. Its success depends heavily on policy support, which could be unpredictable or delayed. Overambitious revenue projections could lead to investor disappointment if unmet.

(With inputs from Zoya and Lovisha)