Tech industry remains in a state of flux

Across the globe, technology spend is showing no signs of revival. That is the reason Q1 performance of Indian IT firms was than the previous quarter. The commentary poses a grimmer outlook as the expected recovery in the second half of the current financial year is gradually fading. Companies like Infosys have started downgrading revenue guidance. It now expects its revenue to grow at 1-3.5 per cent, which is a sharp cut from the earlier projection of 4-7 per cent. Most companies are expecting their revenues to grow in single digit after two years of double-digit growth figures. Among geographies, the most important market, the US has started to show recessionary signs. This is the second consecutive quarter, when the growth rate in the US stayed behind that of Europe. Clients are slowing down project work or altogether cancelling it. Management of large IT firms said volume has been negatively impacted in the last quarter. Enterprises are shutting down experimental projects and are not willing to spend on projects that don’t assure immediate returns. Interestingly, while discretionary projects have dried up, cost takeout deals are coming in droves. That is the reason that despite the gloomy outlook, deal pipeline remained healthy.

In the April-June quarter, which is traditionally the best quarter for the Indian IT industry, TCS reported a robust order book of $10.2 billion. For Infosys, the total contract value of large deals was at $2.3 billion, a tad higher than $2.1 billion reported in the previous quarter. Infosys apparently has won another mega deal worth around $2 billion just after the close of the first quarter. Similarly, Wipro had a total deal booking worth $3.7 billion, out of which $1.2 billion came from large deals. Despite all the large deal wins, revenue accretion of large deals was not significant enough to compensate for the fall in digital deals. This trend indicates that revenue recovery may not happen in the current financial year.

Share prices of IT services companies have started reflecting the current state of affairs. While the stock market was enthused with the TCS results, Infosys’ first quarter results and management commentary have dampened the sentiment. Last week, the Nifty IT index has fallen by around one per cent with Infosys being the biggest loser. Things were not different in the mid-tier space. As expected, barring a few, most mid-tier firms have started to see strain in the overall demand environment. In this context, it can be safely said that the current financial year will be a year of consolidation after two years of fast growth. Amid this gloom, some positives have emerged. Firstly, the wave of cost optimisation deals remains strong. Secondly, after a red-hot employee market, attrition is slowly inching towards pre-pandemic level. Finally, IT services companies are gaining market share in the global technology outsourcing market owing to vendor consolidation. The Indian IT industry is going through a difficult period with some silver lining on the horizon.