Slowdown in US may pull the brakes on Indian IT

Haripriya Sureban | Updated on: Aug 01, 2022
System Security Specialist Working at System Control Center. Room is Full of Screens Displaying Various Information.

System Security Specialist Working at System Control Center. Room is Full of Screens Displaying Various Information. | Photo Credit: GORODENKOFF

Companies are currently spending on digital transformation but softening in bookings can be expected going forward, say analysts

 A probable slowdown in the western economy — a major contributor to the IT firms’ business — would result in a slowdown of revenue growth momentum, adding to the whammy of already declining  operating margins and profits, say analysts. IT company heads, however, are confident of the sustainability of their deal win positions.

The operating margins and deal wins of IT firms are on a downward trend on a quarter-on-quarter (q-o-q) basis for the majority of them. The deal wins for Q1 of Infosys, for instance, stood at $1.7 billion compared to $2.3 billion in the previous quarter. Deal wins for TCS stood at $8.2 billion compared to $11.3 billion last quarter. The margins, too, are under pressure due to travel costs and increased expenditure on compensation. Margins were down 240 basis points for TCS at 23.1 per cent and for Infosys, it was down 360 basis points at 20.1 per cent.

Positive commentary

The commentary on order bookings by top IT managements, however, are seen to be positive. “There has been no slowdown or pullback of spends for us. The demand for our services is robust. Our overall pipeline is at an all-time high, and it continues to be renewed as we are winning deals at a pretty good pace,” said Wipro CEO, Thierry Delaporte, at the company’s Q1 earnings call.

On similar lines, Rajesh Gopinathan, CEO of TCS, had said the firm has not seen any budget cuts or deferments so far. “Looking at the strong order book and our pipeline, this is good visibility for the next few months. The predominant sense is that technology spending will be resilient. That said, given the macro level uncertainties, we remain very watchful,” he said.

Margin pressure

Analysts, however, opine that in lieu of probable slowdown in the US, the high revenue growth momentum could slow down and margins would remain under pressure. Mitul Shah, Head of Research at Reliance Securities, told BusinessLine, “Currently, there is a global fear of slowdown or recession ahead. This uncertainty may cause some businesses to postpone some IT, capex, modernisation and IT spending.”

There has been a sizable decline in deal wins sequentially and the trend doesn’t seem to be encouraging so far. It may be a one-quarter phenomenon, “hence we’d have to wait and monitor the situation in Q2”, he added. “However, once there is some clarity about the probable recession, businesses will come up with a concrete roadmap on their IT spending,” Shah said.

Delayed impact

The impact of a slowdown, if can’t be seen today, will be seen at a later date. Aditi Patil, Research Associate at Prabhudas Lilladher told BusinessLine, “The impact of slowdown in the US and Europe will impact deal wins towards the end of FY23 or the first half of FY24, as the CY22 budgets have already been chalked out.” Companies are currently spending on digital transformation but softening in bookings can be expected as there will be a delay in making decisions. The ability to pay for services may get affected, she added.

Shah said putting both slowdown in revenue growth and growing margin pressure, the IT sector will not continue to enjoy the valuations they had in FY21. “Those valuations probably won’t come back,” he said. The Nifty IT index is down by 10.19 per cent in the last three months. In contrast, the NIfty 50 has dipped 1.83 per cent for the same period.

Published on July 31, 2022
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