Even as talks about a potential recession in the US economy gain momentum and brokerage houses expect it to hit in the coming year, analysts believe it will negatively impact both the US and Europe’s IT spending and its economy. turn the information technology (IT) companies in India including TCS, HCL Tech and Infosys. Indian IT companies depend on the US market for about 40 percent of their revenues.
On the likelihood of a recession, US-based brokerage firm Goldman Sachs has said in its report that it sees a 30 percent chance of the U.S. entering a recession the following year and a conditional 25 percent chance in the second year if a recession is avoided in the first. Bank of America Securities also sees a roughly 40 percent chance of a US recession next year, while inflation remains persistently high.
Alok Bansal, MD and global head (BFSI business) of Visionet Systems India, said: “In March this year, India saw its highest inflation since October 2020 with a peak of 6.95 percent. We also cannot overlook the possibility see mild effects of the US recession hit us.”
He added that the contribution of the US market to the revenues of Indian IT companies is about 40 percent. A large part of the turnover also comes from the UK, Germany and France. “In the event of a recession, we will see our IT spending fall further. We have already seen how the global crisis in 2008 affected the IT and BFSI industries and we need to be on the alert as technology spending will fall as the economy slows further.”
In the June 2022 quarter, India’s largest IT services company Tata Consultancy Services (TCS) has reported a consolidated net profit of Rs 9,478 crore for the June 2022 quarter, up 5.2 percent year on year. The company’s revenue increased by 16.2 percent to Rs 52,758 crore in April-June 2022, compared to Rs 45,411 crore in the same period a year ago.
The net profit of IT giant HCL Technologies rose 2.4 percent year-on-year in its net profit to Rs 3,283 crore in the June 2022 quarter. Wipro on Wednesday reported its June quarterly profit at Rs 2,563 crore, down 20.9 percent year on year. -on-year. Wipro’s revenue for the quarter rose 17.9 percent year-on-year to Rs 21,528.6 crore. The operating margin in the IT services segment decreased by 200 basis points quarter on quarter to 15 percent.
Sumit Pokharna, vice president (fundamental research) of Kotak Securities, said: “Currently, management of most Indian IT companies is optimistic about global demand for IT services, despite an uncertain macro environment. In fact, in Q1FY23, they indicated that the current deal pipeline is strong and at an all-time high in some cases. The optimism of Indian IT companies will be tested, especially in the slowdown phase in the second half of the fiscal year.”
Pokharna added that much depends on monetary policy and the inflation trajectory of the global central bank in the developed countries. The US Fed’s aggressive quantitative tightening to curb inflation could lead to a slowdown in demand. In addition to the US, a challenging economic environment in Europe also brings uncertainty to customers’ IT spending.
Vivek Iyer, partner and leader (financial services risk) at Grant Thornton Bharat, said a slowdown in the US would essentially mean rationalizing and reprioritising some capital and operating expenditures. “This will translate into reduced growth for the tech industry – margin protection will be the industry’s main focus over the period, given limited growth due to the slowdown in the US.”
Kotak’s Pokharna also said: “We do not rule out the possibility that Indian IT companies will suffer from slowdowns in the customer-facing regions. Furthermore, companies with greater exposure to discretionary spending are more at risk of IT spending cuts… In terms of margins , most IT companies experienced margin pressure in Q1FY23. On a sequential basis, headwinds in the form of wage revisions, increases in travel costs, visa costs and declines in utilization have been seen as companies ramp up newer hires to meet demand .”
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