Indian IT sector faces choppy FY24; stability in Q4FY24

IT industry in India

IT industry in India is up against some serious headwinds. The post-pandemic recovery coupled with unstable market conditions led to the global and local IT sectors witnessing some of the most tumultuous times in recent memory. This phase had a rather pronounced effect on the financial performances of top-tier companies. TCS and Infosys, which declared results last week, reported subdued earnings and also missed street estimates. 

In the case of Infosys, the guidance was also quite tepid on sales growth and also on operating margins. TCS does not give guidance, but the weaker than expected performance was not missed out by the street. To be fair, the cautious trends in the IT sector have been visible for the last many months with FPIs consistently being sellers in the IT sector. The slowdown is also resulting in pricing pressures amid lower tech spending and tighter competition.

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Banking crisis adds a new puzzle for US markets

Recently, the US banking sector came up against a major challenge as couple of its mid-sized banks went bust and more showed signs of instability. The highly popular mid-sized banks like Silicon Valley Bank and Signature Bank went under while the First Republican Bank survived only due to some rescue flow of deposits from JP Morgan and Morgan Stanley. 

For Indian IT companies, BFSI still remains 45-55% of its top line and the banking crisis hit the tech spending of banks quite hard. However, the recent results of JP Morgan and Wells Fargo have been solid, and experts are now veering around to the view that the crisis may not be systemic. Instead, there could be more of banking business gravitating towards the big boys, who are seen as much safer bets than the new-fangled banking names. 

Mid-sized banks could cut IT spending this year

This is a direct consequence of the fall of several mid-sized banks in the US. That has forced a number of these banks to go slow on tech spending and instead spend the funds on sprucing up their liquidity and capital. This left an adverse impact on client sentiments in the BFSI sector, leading them to defer on spendings and instead focus on putting their solvency in order.

With most mid-sized banks seen macros deteriorating, they would rather spend the funds on their capital adequacy and solvency rather than take up tech spending. It is more an issue of the current priority. Most mid-sized BFSI clients are cautious and playing it safe for now. This shift could hit growth expectations for the first 3 quarters of FY24. 

Global recession concerns are still rampant

There is growing concern amidst economists that a recession is imminent in 2023 if the US Federal Reserve continues to adopt hawkish policies. Higher rates have hit growth and consumption and it is gradually hitting corporate spending too. Normally, in any recession, the companies typically look at two things. Firstly, they look to cut tech spending and second they bargain on pricing. Both are happening with Indian IT companies.

While the problem of attrition is gradually coming down and costs are normalizing, the real concern for Indian IT companies is in the top line. That is the stress shown by the results of Infosys and TCS. In the next couple of weeks, the results of other tech biggies like HCL Technologies, Wipro and Tech Mahindra will be out. The weak trend is likely to continue! 

Source: Financial Express