Much to the sector’s disappointment, ambiguities over US Fed’s rate cut timing have been a spoiler. But light appears at the end of the tunnel
The US Federal Reserve’s timing of interest rate cuts back and forth has been a big spoiler for businesses across the globe, and more so for the Indian IT industry. In December 2023, when the central bank announced that in 2024, it would likely implement three cuts of 25 bps each, there was hope that things would come on track sooner than expected for the domestic technology companies. It was being said that it could come soon with some predicting it to come around the end of the January-March quarter of 2024.
That hope was put to rest earlier this month with the Fed remaining non-committal on the timing while emphasising that inflation remained stubborn and any call to cut rates would depend upon how data presents itself going ahead. To make matter worse, the retail inflation jumped to 3.4 per cent in December 23, which was the highest in three months.
While the target inflation level in the world’s largest economy was 2 per cent, the current levels remain outside the Fed’s comfort zone despite coming down from a whopping near 10 per cent approximately a year back.
The Indian IT sector accounts for USD 245 billion in IT services exports and if the developed world slows down, the ripples are certainly going to be felt by the Indian businesses. When interest rates are high, the cost of operations go up. In this case the slowdown in the US economy looked imminent and that triggered massive spending cuts by the companies.
Analysts now estimate rate cuts certainly not in March and probably around June. This means that the companies in the US and other developed economies are unlikely to loosen their purse string much to the discomfort of Indian IT industry.
That discomfort is reflected in the revenue growth guidance or post earnings commentary of top tier companies viz. Tata Consultancy Services (TCS), Infosys, HCL Technologies and Wipro. Last week they announced their December quarter earnings highlighting headwinds on the revenue growth front.
The sector still finds itself leashed on account of elevated interest rate regime that has the potential to slow economies. The companies are preserving cash to face anticipated crises, should they come. While winning deals continue to swell for the Indian IT companies, they are not translating into revenue after getting shelved, or getting cancelled in a few cases.
Light at the end of tunnel
Notwithstanding the headwinds, there are signals that the worst is behind now. The commentary now appears more optimistic and that has enthused the sector. It is a popular view now that the industry has bottomed out and now a trend reversal is only a matter of time.
With interest rate cut not happening during this quarter, the revenue growth is expected to remain muted for the sector though some aberrations here and there cannot be ruled out. But companies are hopeful that the trend will start reversing from the new financial year and having navigated their way for so long, they have to get through just the current quarter.
October-December, which is seen as a seasonally week quarter on account of holidays, was bogged down by furloughs as the IT companies did not have enough work. Over the past many quarters, companies who signed deals with the IT companies have preferred to put their projects in abeyance and have even hesitated to award new orders. That has severely impacted the revenues of Indian IT firms.
The second half of the previous year was particularly bad not just for the IT companies but also for professionals. According to reports, the India’s top nine IT services companies witnessed a combined decline in quarter-on-quarter (QoQ) headcounts by over 50,000 in the September quarter. Infosys handed over highest number of pink slips at 7,500 on the QoQ basis while taking the tally to over 16,400 on the year-on-year basis. This was unfortunate as the sector prides itself to be among the top employment generators.
The top companies have managed to lower attrition in this quarter as there haven’t been enough jobs for professionals to switch to. However, HCL which has delivered the best results among the top four has announced that it would continue to hire more people. That is good news, for a change.
The US has defied recession; Europe is recovering and India remains in the best shape among the major economies with its GDP projections for FY24 revised upwards. The industry is on the cusp of turning around the corner.
Generative AI is in vogue and has been finding mentions in board rooms. Artificial Intelligence in general will disrupt virtually every industry and this points towards more work for IT companies. There are now separate AI verticals in most tech companies and the floodgates will open once the interest rates begin going down and companies start spending on discretionary projects.
In fact, AI in 2024 will likely cease to be a discretionary spend.
India’s IT services sector is very competitive and it rests on strong fundamentals. This applies not just to top 5-6 companies but also to the underdogs. They have weathered the storm and now is the time to let loose.