- Date : 11/09/2022
- Read: 3 mins
Software companies in the US are expected to scale down their budgets by 5%-6%, resulting in a direct decline in contracts with Indian IT companies such as TCS, Infosys, Wipro, etc.
Signs of economic slowdown in the US and potential recession in other countries such as the UK, Australia, New Zealand, Taiwan, and the Philippines will have a small, yet sure, impact on the Indian economy. The impact will be more evident on the Information Technology (IT) industry, which generates between 40% and 78% of its revenue from offshore clients.
The present scenario:
As per JPMorgan’s tech team report, software companies in the US are expected to scale down their budgets by 5%-6% in nominal terms owing to inflationary pressure. This will result in a direct decline in contracts with Indian IT companies such as Tata Consultancy Services (TCS), Infosys, Wipro, and Tech Mahindra, which have over half their international business coming from the US.
Indeed, Wipro and HCL Technologies have both posted their lowest earnings before interest and taxes (EBIT) margins in recent years. Infosys has posted lower operating margins as well, when compared with the previous year.
The start-up ecosystem has taken a major beating too. According to a report by Tracxn Technologies, start-up funding has plummeted by about 33% - from $10.3 billion in the first quarter to $6.9 billion in the second quarter on account of the US recession news and volatile financial markets.
What the experts think?
The Indian IT Industry is dealing with challenges on multiple fronts. On the one hand, spends have gone up because of costs associated with hiring and retaining IT employees. At the same time, operating costs are rising owing to higher commodity and energy prices, and consequently, they are dealing with lower demand as businesses put a brake on discretionary IT spending.
JPMorgan has downgraded the IT industry as ‘underweight’ for shareholders and potential investors with slipping margins and lower growth expectations. “We see rising margin headwinds in 1H and revenue headwinds from 2H from a potential macro slowdown. We see peak revenue growth behind us and EBIT margins trending down from inflation, mean reversion. We feel there are more downside risks to current earnings assumptions. We stay underweight (UW) on the Indian IT sector,” a note stated.
Research firm EIIRTrend believes the impact on IT companies will vary depending on their exposure to different sectors, especially those susceptible to inflationary change such as manufacturing, travel, non-essential retail, etc. The agency believes the recessionary impact may only be felt for a short while as the value proposition for the IT industry at scale continues to remain intact.