India’s bellwether sector, the IT industry, has displayed enough character in the face of adversity by refusing to cow down. The top companies have been showing flexibility in operation, increasing efficiencies to make up for the recent stagnancy in growth
As they say, the elephant has passed and only the tail remains which means that a large part of the problem is over with minor troubles left behind. The Indian IT industry would be hoping for the same, after wading through the last few quarters in uncertainties. A couple of quarters down the line, India’s bellwether sector is hoping to get back into the pink.
The country’s information technology and software services industry, commanding a niche in the global arena, has been contributing immensely not just in the national growth but also in India’s emergence as a soft power. India exported software services worth USD 245 billion in FY2023, displaying exemplary growth year-on-year. The exports have grown faster than the domestic economy.
However, the fortunes of the sector rest on the performance of primarily half a dozen big companies in the country, at least the direction of which way the wind is blowing. These companies are Tata Consultancy Services (TCS), Infosys, HCL Technologies, Wipro, LTIMindtree and Tech Mahindra with the market capitalisation in the same pecking order. Between them, they account for over Rs 25 lakh crore (USD 243 billion, approx.) of market capitalisation.
Then there are smaller companies which also cater to the services from offshore clients.
The sector has been in the news for the last six months now amidst the fear of a slowdown as the world grapples with high inflation and economic downturn. The road has not been easy for the industry as even the big fish feel the heat. The companies have already announced their June quarter earnings and with the exception of TCS, all others have missed the estimates of the analysts.
Should this ring alarm bells?
Not, unless some other adverse disruption happens in the form of a war, inflation shooting up again leading to further interest rate hikes or an unannounced pandemic. The global order was disrupted by the successive waves of Coronavirus pandemic followed by the Russia-Ukraine conflict. The disruption came on the back of the already slowing economies. The Russia-Ukraine conflict just amplified the problem with inflation getting out of hand in most major economies. This engineered a cycle of interest rate hikes across the world hitting consumption, and thereby businesses across the board.
That phase appears behind now with inflationary trends cooling-off in most economies of relevance and particularly in the USA. The world’s largest economy has shown great resilience by refusing to fall into recession, despite a record-breaking high inflation interest rate cycle. The impact of the Federal Reserve’s decision to suck excess liquidity from their system and increase interest rates, to stop easy money going into the hands of people, is now showing some fruition with month on month drop in the consumer price inflation. The Fed’s priority for price stability over economic growth has evoked fears that the country would go into recession, even if it might for a brief period.
The economic indicators still remain strong with a robust job market even as the inflation comes down. This augurs well for businesses not just in the US but also significant markets like India. But one cannot ignore the cost of interest rate hikes on the lives of people and prospects of the companies.
Display of Resilience
The Indian IT industry has displayed enough character in the face of adversity by refusing to cow down. The top companies have been showing flexibility in operation, increasing efficiencies to make up for the stagnancy in growth. Unlike global technology companies, they have refrained from sacking employees in the name of cost cutting.
The quarterly data of these big companies show that they are sitting on top of significant deals worth billions of dollars. This augurs well for them and should see them through once things improve and companies start spending on discretionary IT services. The Indian IT companies have 70-80 per cent of their export business coming from the developed geographies viz. America and Europe, with the remaining coming from the rest of the world.
Visible Trends
The trend over the past four to five quarters has been that the companies have become frugal in spending money on those IT services that are critical to their business operations and have a higher return on investments (RoI). The cost optimisation has taken a driver seat with discretionary IT spendings going out of the frame.
Many of the deals were pushed back as the companies across sectors faced liquidity crunch which hit not just the revenue growth of the domestic IT companies on the sequential and year-on-year basis but also their profits.
The priority spending by companies have been largely on cloud modernisation, cyber security, internet of things (IoT) and Artificial Intelligence (AI). The banking and financial services segment which has traditionally been the biggest source of revenue for the Indian IT companies ruled the roost when it came to big deals clinched by them. Other areas which generated big interest were life sciences, health and manufacturing.
Outlook
The guidance by the Indian IT companies remains one of caution and hope. They see spending in IT services and products getting back in the next few quarters.
From the indications given by the US Federal Reserve and top central banks elsewhere, rate cut is unlikely to happen this year. We could also see a couple or at least one interest rate increase during this year.
The likelihood of a pause would be encouraging for businesses especially in the event of low inflation. This hope does not look pedestrian now.
Green shoots are showing now and most likely by the end of this quarter, the sunny side should start appearing.
