IT firms seen bracing themselves for spending cuts by clients

The slowdown in client spending might also force the outsourcing giants to curb their fresher hiring and find new ways to cut costs

Indian IT firms are expected to submit lacklustre report cards for the fourth quarter and warn about demand in the year ahead as their clients curtail spending amid global economic uncertainties, inflationary pressures and a banking crisis.

The slowdown in client spending – especially in the all-important banking, financial services and insurance (BFSI) sector – might also force the outsourcing giants to curb their fresher hiring and find new ways to cut costs in a bid to protect profit margins.

“There is definitely a slowdown from the torrid post-pandemic levels. Discretionary spending has come down and the market is in a pause waiting to see what will happen regarding the recession,” said Peter Bendor-Samuel, the chief executive officer of global IT research firm Everest Group.

Last month, Accenture Plc, which is the world’s largest technology services company, revealed plans to cut 19,000 jobs — about 2.5% of its workforce — over the next 18 months. Many Big Tech companies such as Alphabet, Amazon, Meta and Microsoft have also slashed jobs in recent months amid fears of a global recession.

Going forward, Indian IT firms might focus on deal pipelines “with large transaction sizes” in a bid to offset the decline in discretionary spending by clients.

The only good outcome of the recent developments might be a fall in attrition as many tech workers choose to stay put and take fewer risks amid larger uncertainties, industry watchers told DH.

“Attrition is significantly down and almost back to pre-pandemic levels. This is very good news and will relieve some pressure on margins,” Bendor-Samuel said.

Banking-sector woes

BFSI clients are vital for the growth of Indian IT firms as they typically account for a third of the outsourcers' revenue.

TCS and Infosys had the highest exposure to Silicon Valley Bank – the largest U.S. bank failure since the 2008 financial crisis – and other US regional banks, according to a recent JP Morgan report.

The ripple effect of the troubles at these banks and those at Swiss bank Credit Suisse – whose 167-year run ended after rival UBS was pushed to buy it by regulators to arrest further panic about the banking industry – could lead to an austerity drive in the global financial sector, thereby leaving less room for tech spending.

“The collapse of SVB, Signature Bank and concerns of liquidity across US and the European Union can further soften tech spends by banks over the short term in a year with slowing growth in bank tech budgets,” JP Morgan analysts said in the note.

That would come at a time when high inflation was already making many clients in the retail and consumer goods segments curtail spending.

“Management commentary is likely to be cautious. With many top-level exits, there seems to be dissatisfaction about the level of growth,” IT industry veteran and Siana Capital Management Founder Siddharth Pai said. “As the cost of resources has changed, wage inflation is definitely there. So, growth expectations are subdued.”

Accenture’s move to slash employee headcount indicated cost pressure owing to wage inflation, Pai pointed out.

The recent developments have made many analysts predict overall IT hiring in the next financial year to be lesser than the level seen in the last two boom years.

“Employee count for some services providers dipped in the third quarter. This trend is likely to continue in the fourth quarter and beyond,” said Pareekh Jain, an IT outsourcing advisor & Founder of Pareekh Consulting.

Tepid sequential revenue growth

Brokerage firms have projected tepid sequential revenue growth in the fourth quarter.

ICICI Securities expected Infosys’ revenue growth to be 0.1% quarter on quarter on a constant currency basis and operating margin of around 21.5%, remaining flat versus the previous quarter.

Market leader Tata Consultancy Services and smaller rival HCL Tech are expected to perform better than Infosys in revenue terms. Motilal Oswal Securities said TCS could reap the benefits of a large number of cost-takeout deals in the market and post a 0.9% sequential rise in revenue.

HCL is expected to benefit from more cloud deals and report a revenue growth rate of 0.5%. However, Wipro is expected to see a decline in its revenue growth rate by 0.5% in the fourth quarter owing to weakness in its consulting business.

The predictions are based on the huge developments in recent months.

“If we infer the Accenture results, one thing that stands out is that the hi-tech vertical witnessed zero growth. Now, banking turmoil has aggravated the slowdown fears, with signs of crisis emerging from small banks to large ones,” said Pareekh Jain, an IT outsourcing advisor and founder of Pareekh Consulting. “ So, the order book of both BFSI and hi-tech verticals, constituting more than half of the portfolio, will be in focus.”

The fourth-quarter employee headcount numbers at large and mid-tier firms could also give clues to the evolving demand environment. Despite having a record deal booking in the January-March quarter, Accenture decided to lay off 19,000 staffers.

To make things worse, ominous signs of pricing pressure have started to emerge in the large-deal space.

“Contractually committed prices for infrastructure outsourcing awards continue to decline. However, market prices are falling even faster as productivity improvements and competition drive them down,” Consultancy ISG said in a report, highlighting how the price decline was in the range of 10-30% over a five-year period.