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TECHNOLOGY: Quarterly industry commentary: Fewer pockets of weakness

.  TECHNOLOGY: Quarterly industry commentary: Fewer pockets of weaknes

Macroeconomic weakness due to rising interest rates, elevated inflation, and the resultant slowdown in corporate growth has led to heightened concerns on demand for IT Services. We analyzed 40 companies across seven key industries to attain a sense of demand environment. Key snippets of their commentaries (detailed in this report) suggest limited cutbacks, with the exception of severely impacted sectors such as Retail. We continue to see long-term demand for IT Services, and retain our positive stance on the sector.

Mixed corporate commentaries from key industries

• Given the concerns on macroeconomic weakness, we analyzed the industry demand and spend commentaries of 40 companies across seven key industries – which contributed a majority of revenues for the IT services sector – for a better understanding of the spending patterns.
• Overall, the commentaries were mixed, with industries such as Banking (more visible in traditional banks), Automotive, Technology and O&G remaining positive on their technology spends, while others like Retail, and parts of Manufacturing and Telecom suggesting adverse impact on their opex budgets.
• While the commentary across IT services universe was positive in the last quarter, we remain vigilant on companies with elevated exposure in areas that are witnessing adverse impact (such as Mindtree in Retail, HCL Tech in Manufacturing and Tech Mahindra in Telecom).
• We expect the Indian IT companies to clock 11% CAGR over FY22-24.

Long-term demand intact, BFSI spends remain resilient

• The commentary from major Banks, the trajectory in IT spends, and ongoing transformational projects suggest sustained demand from the BFSI sector, despite an unfavorable macro environment causing headwinds in the Mortgage business.
• Businesses continue to invest in Digital transformation as it has become paramount to the success of a business. With 30-40% workloads in the Cloud, there is still room left for Horizon I, II, and III deals.
• The strong traction in areas like IoT, Cybersecurity, 5G, and EVs, and increasing focus on emerging areas like the Metaverse, NFTs, Crypto currencies, and Blockchain technology continue to provide multi-year tailwinds to the IT sector.

Rising macro concerns leading to a slowdown in Retail

• Increasing macro concerns and a slowdown in GDP growth; rising inflation in the US and Europe – the largest geographies for Indian IT Services; and ongoing geopolitical tensions are resulting in a near-term uncertainty in the Indian IT Services space spend from Retail vertical.
• Major retailers are reporting slower revenue growth, lower profit on account of inflation, supply-chain disruptions, and non-availability of key raw materials. Gross margin for these companies are also shrinking as price increases are not catching up with the inflation in raw materials.
• As Indian IT Services source a significant share of revenue from Retail, the cuts in IT budgets can affect the demand for IT Services companies.