Decrease in demand from Western markets a big challenge for Indian IT services firms

On Monday, when shares of Infosys fell by over nine per cent and experienced its worst single-day fall since 2020 amid lower-than-expected quarterly numbers and FY23 guidance, it send jitters across the Indian IT services industry, with many wondering if the sector is staring at tough times. The IT major had reported a 3.2 per cent decline in constant currency revenue, which is the worst in the last few years. The company now expects constant currency revenue growth of 4-7 per cent in the financial year 2024.

Experts with whom THE WEEK spoke feel that currently, the Indian IT services sector is facing various challenges due to the global economic downturn and a decrease in demand for projects. “Major IT companies such as TCS, Infosys, and Wipro were not able to keep up with the expectations of investors in terms of revenue and growth. As these companies are now dealing with excess talent, we expect them to take a cautious approach when hiring talent this year. Their main focus will be on optimising costs and improving overall efficiency,” Aditya Narayan Mishra, MD and CEO of CIEL HR, told THE WEEK.

He added that despite the challenges, there are advanced skills such as cybersecurity, data engineering, cloud technologies, and semiconductor technologies that continue to remain in demand. “As the economy stabilizes and companies regain their confidence, the situation could improve in the later quarters of FY24,” remarked Mishra.

As per experts from HDFC Securities, the low probability sequential decline (eight times in the last sixty quarters and four times in ex-GFC [Global Financial Crisis] and Covid quarters) was due to a combination of deal cancellations and deferrals largely from North America, mainly in the BFSI (banking, financial services and insurance) and the communication vertical. The recent senior-level exits and the possibility of continued stress from large accounts are risks faced by Infosys. Experts at HDFC Securities expect Infosys to grow below TCS for FY24.

“The demand markets in North America and Western Europe are in unprecedented flux. So the Indian IT sector itself has been surprised by the intensity of this impulse. How well the economy in the Western hemisphere modulates to stability, will in itself determine the future charts of the sector,” said Alok Shende of Mumbai-based Ascentis Consulting.

As per a recent report by Emkay Global on Infosys, the company is facing macro uncertainties and highlighted weaknesses in parts of BFSI (mortgage, asset management, and investment banking).

Besides, the discretionary spending in retail continues to be under pressure, while manufacturing is showing resilience on the back of large deal ramp-ups and benefits in vendor consolidation. As per Infosys, currently, North America presents a more challenging operating environment than Europe.

According to a recent analysis of the IT services sector, Indian IT service companies are expected to report muted revenue growth in Q4 of FY 2023 owing to slower decision-making and increased cautiousness amid macro uncertainties, the recent banking crisis, weaker discretionary spending, and the usual March quarter seasonality.

At the same time, it remains to be seen whether in the near future there would be deferment or cancellation of projects due to macro uncertainties and high inflation, management commentary on the changing nature of deals (cost takeout vs. business transformation) and potential impact on technology spending from high inflation and economic slowdown. Though the Indian IT services firms do not have meaningful exposure to the affected US regional banks, fears of a banking crisis could impact near-term IT spending by banks.

Though secular demand is still intact in certain verticals and service lines, there is near-term caution among clients. There may also be some delays in decision-making, which might lead to project deferrals and a pause in execution.