21 August 2019 14:24:21 IST

Indian IT companies shiver as global economy sneezes

Uncertain economic conditions worldwide are impacting revenue growth for IT majors

The uncertain global economic environment is also impacting India’s IT sector, with the recent quarterly results of IT services companies showing signs that revenue growth in this sector is slowing.

As of now, except for Wipro and Tech Mahindra, the IT majors have reported Q-o-Q growth in revenues in the June 2019 quarter. Most of this increase has come from North America (mainly, the US). Robust growth in the US economy is making clients spend more to stay competitive, and this has helped IT players bag new contracts and deals over the past few quarters.

But the US’ long-drawn trade dispute with China has dampened the hopes of many businesses. This will directly impact their future IT spends. In an uncertain environment, companies would like to wait and watch how things develop before deciding to spend big on technology upgradation.

The trade war is one of the most pervasive risks for Indian IT services, and if its economic impact results in a recession in the US, and the world as a whole, these companies’ revenues could be seriously hit.

Signs of slowing IT spends in the banking and financial sectors has led to several mergers and acquisitions in Europe and the US. Once these deals go through, spending on upgrading IT systems and widespread adoption of digital services might get a push.

Growth in IT firms’ financial services business in the past few quarters has come from payments services, improved digital experience for customers, and analytics and cloud services. These continue to drive line of work of TCS, Infosys and HCL Tech.

Slowing Europe

Although, major players such as HCL Tech, TCS and Infosys continue to see revenue growth, there are some regions, like Europe, where most IT services companies are witnessing slowdown in clients’ IT spends. Here too, there have been exceptions — TCS and Infosys, for example. Growth in Europe’s pre-eminent economic power — Germany — has been slowing for almost a year now, and this has cast a damper on the European economy as a whole.

Many European manufacturing clients of the top-tier IT firms are also tightening their purse strings because of concerns on economic growth. Only HCL Tech and TCS saw revenues from manufacturing clients rise, while similar revenues for Infosys, Wipro and Tech Mahindra’s fell Q-o-Q in June 2019.

Digital drives revenue

Legacy businesses of IT infrastructure maintenance are not going to see growth in the future as companies are moving their data storage needs to the cloud. This has led to a spurt in demand for IT companies to build services related to cloud storage, management, migration and analytics.

IT players have tied up with cloud services providers such as Azure and Amazon Web Services to provide a full suite of services to customers who want to migrate their data storage to the cloud.

The rapid adoption of mobile phones and fast internet connectivity has made digital presence essential for businesses. Four of the top five Indian IT services companies earn nearly one-third of their revenues from digital. This, apart from being a high-margin business, also means that they are of short duration. IT firms will now have to keep bagging new deals regularly to satisfy investors’ need for constant revenues.

As a result, companies are trying to build a robust pipeline in digital projects, and sign off deals so that specialist staff continue to remain engaged.

Employee retention

New skill-sets are required with new-age demands. Managing to grow will also mean managing the aspirations of the employees. Employee cost being the single largest cost bucket, idle employees will mean lower utilisation of time, impacting operating margins.

At the same time, barring TCS, companies are finding it difficult to retain employees. Hiring new personnel and training them will push up costs further. Attrition for Infosys in June was nearly 25 per cent. This shows there is serious churn, leading to instability and making it difficult for a company to operate optimally.