The Indian IT sector is set to bear the brunt of multiple headwinds in the coming quarters with the global slowdown dampening IT spending, major dependence on the US markets, and high exposure to the BFSI sector.
Given that the BFSI sector is a significant revenue contributor — 20-40 per cent to most large Indian IT companies, the current banking fiasco in the US involving Silicon Valley Bank (SVB), Credit Suisse, Silvergate, and First Republic Bank may have a notable impact on the Indian IT sector.
Omkar Tanksale, Research Analyst, Axis Securities, told businessline, “Deals from the BFSI sector may be impeded as newer automation processes and transformation initiatives may be put on hold. While fresh expenditure may get postponed, ongoing maintenance procedures will still be carried out.”
“BFSI is one of the largest verticals, thus it has a direct bearing on the business of IT companies, albeit it may vary depending on the client base. Currently, there is no alarming signal to arrive at any specific conclusion figure in terms of measuring the magnitude. Nonetheless, the impact could be seen in new orders and contracts,” Mitul Shah, Head of Research at Reliance Securities, said.
A recent note by Wedbush Securities has also flagged that the recent collapse of the SVB may result in enterprise clients pushing their IT spending decisions. It also stated that this would result in extended sales cycles and postpone the budget cycle for this fiscal year. The primary spending impact, it said, will be on the BFSI and high-tech verticals.
JP Morgan, too, has noted that IT majors TCS and Infosys have the highest exposure to regional banks in the US that are gripped by financial turmoil. Regional banks in the US account for 2-3 per cent of their revenue, the exposure to SVB could be 10-20 basis points for TCS, Infosys, and smaller rival LTIMindtree, with TCS in the lead.
However, Tanksale noted that the effect may not be severe as IT companies, in the recent past, have diversified their portfolios, and the current order pipeline from the sector will remain intact.
In addition to the probable effect the banking crisis would have, the larger woes of global slowdown bought on by various macroeconomic headwinds continue to be a reason for worry. With the US and Europe being the largest revenue contributors to Indian IT companies, the effect of the slowdown in these economies will continue to impact the sector in the next few quarters.
Sumit Pokharna, Research Analyst-Vice-President, Kotak Securities, said, “ As far as topline or revenue growth is concerned, there will undoubtedly be significant issues since a recession-like scenario is playing out in developed countries, and the fact that discretionary spending is slowing down is a very clear sign that this is the case.”
Analysts say there will be a slowdown in the growth momentum in the next couple of quarters. “The new order inflow or TCV in the upcoming quarters will be affected. There may not be a cancellation in deal wins, but there will likely be a delay in the execution of any orders that have been won in the previous few quarters,” Shah noted.
Amidst the slowdown, Indian IT sector has also seen various leadership changes. Recently, Infosys’ ex-President Mohit Joshi was appointed as MD & CEO of Tech Mahindra, who would be replacing CP Gurnani. The IT bellwether TCS, too, in a sudden move announced that its CEO Rajesh Gopinathan will be stepping down and K Krithivasan, the head of BFSI vertical would be taking the position.
The stress on the sector can be seen in the stock price movement of top IT companies. Shares of TCS, Infosys, HCL Technologies, and Wipro are down by 13.25 per cent, 24.13 per cent, 6.34 per cent and 38.61 per cent, respectively compared with their values a year earlier. In the last one year, BSE IT Index is down by 25.41 per cent, while the broader BSE Sensex is up by 0.59 per cent during the same period.
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