Tech spends on track for now, but many unknowns may derail prospects

Market leader Tata Consultancy Services (TCS) kick-started earnings season with a good set of numbers on Monday. After global major Accenture, TCS' fourth quarter and FY22 performance indicate that demand environment globally remains strong. Notwithstanding the recent events such as Russia-Ukraine conflict and subsequent rise of commodity prices raising the fears of a hyperinflationary environment, the management commentary from TCS painted an optimistic growth prospect for FY23. Especially, the company views that there might not be much second order impact arising out of the Ukraine conflict. Also, technology is leveraged to cut costs for enterprises at the time of downturn. So, any negative impact of the war on global enterprises will accelerate their spend on technology to save cost and operate more efficiently. In this regard, Indian IT industry seems to be on a good spot. Though there are many unknowns in any war-like situation, domestic IT players are hopeful of tide over those challenges.

While pipeline of outsourced contracts remains healthy, there is a strong likelihood that Indian IT firms will face cost pressure in the current financial year. These are driven by many factors. Firstly, employee attrition refuses to come down despite several employee engagement initiatives and a record fresher hiring. Companies are forced to pay more to backfill the position of those employees who are switching jobs. So, wage inflation is real and there are no signs of its abating in the coming quarters. Secondly, IT firms are keen to bring back their employees to offices which they hope will help in checking attrition. Also, work-related travel has resumed. Therefore, expenses on these accounts have started to show up on the accounts of IT firms. In FY23, operating margin pressure is very much likely. Market participants have to tamper their expectations of return in this context.

While most tier-I companies and leading mid-tier firms are likely to post strong growth in revenue and profit, concerns over supply side issues are likely to persist. The war for hot talent is on as IT firms fight it out to hire and retain good talent in the market place. However, there is a silver lining. The Covid pandemic and the Ukraine war are prompting enterprises to shift more work to India. India, therefore, is gaining credibility as an offshore destination due to large pool of engineering talent and stable business environment.

Though most things are working in Indian IT industry's favour as indicated from TCS' results, there is no denial of the fact that global economic environment is facing a challenging time. And a downturn due to higher food and fuel inflation, supply chain disruption and infighting between global powers can't be ruled out. If that happens, companies are likely to face client-specific issues. As seen earlier, any downturn leads to enterprises announcing bankruptcy or severe impact on their balance sheet. This, in turn, hampers their ability to spend on technology. In this perspective, the final word on the growth prospects is yet to be spelled out. It's better to form a judgement in the second half as the global events unfold in the coming months.