The recession will affect information technology (IT) companies in India, including TCS, HCL Tech and Infosys
Even if talk of a possible recession in the US economy gains traction, with brokers expecting it to do so next year, analysts believe it will affect negatively affect IT spending in the US as well as in Europe and turn, will affect information technology (IT) companies in India, including TCS, HCL Tech and Infosys. Indian IT companies depend on the US market for about 40% of their revenue.
Regarding the possibility of a recession, US brokerage Goldman Sachs said in its report that it forecasts a 30% chance of the US entering a recession next year and a conditional 25% chance in the next two years. five if one thing can be avoided. First. Bank of America Securities also sees a 40% chance of a US recession next year as inflation remains high.
“In March of this year, India experienced its highest inflation rate since October 2020, peaking at 6.95%. This was the highest rate since October 2020,” says Visionet Systems India’s Alok Bansal. We also cannot ignore the possibility that the mild consequences of the US recession affect us. “
He added that the US market’s contribution to Indian IT companies’ revenue is around 40%. A large portion of income also comes from the UK, Germany and France. A downturn in the economy would result in further reductions in IT spending for our company.
We have already seen the impact of the global crisis of 2008 on the IT industry and BFSI and we need to be on guard as there will be a drop in spending on technology if the economy slows down.
In Q6 2022, India’s largest IT services company, Tata Consultancy Services (TCS), reported a consolidated net profit of Rs 9,478 crore for Q6 2022, up 5.2% on a base office every year. June 2022 increased 16.2% to Rs 52,758 from Rs 45,411 a year ago. Net profit of major IT company HCL Technologies increased 2.4% year-on-year to Rs 3,283 in the June quarter of 2022.
Wipro on Wednesday posted a June quarter profit of Rs 2,563, down 20.9 % compared with the same period last year. Wipro’s revenue for the quarter rose 17.9% year-on-year to Rs 21,528.6. Operating margin in IT services fell 200 basis points quarter-on-quarter to 15%. The majority of Indian IT executives are optimistic about global demand for IT services, despite the uncertain macroeconomic climate, according to Kotak Securities Vice President (Fundamental Research) Sumit Pokharna.
In fact, during the first quarter of FY23, they reported that the current trading process is robust and in some cases at an all-time high. The optimism of Indian IT companies will be tested, especially during the downturn of the second half of the financial year”.
Pokharna added that much depends on the world central bank’s monetary policy and the path of inflation in the developed world. The US Fed’s quantitative tightening to control inflation may reduce demand. In addition to the US, the challenging economic environment in Europe is also causing uncertainty in customer IT spending.
Vivek Iyer, partner and leader (financial services risk) at Grant Thornton Bharat, said the US downturn essentially means streamlining and reorienting some capital and operational spending. . “Due to the US recession, the tech industry is expected to experience a reduction in growth – protecting margins is expected to be a key focus during this time.”
Kotak’s Pokharna also said, “We do not rule out the possibility that Indian IT companies will face the brunt of the downturn in customer-centric regions. In addition, companies with a high rate of discretionary spending are more at risk due to reduced IT spending.
In terms of margins, most IT companies continue to face signing pressures. fund in Q1FY23. On a sequential basis, difficulties come in the form of revised wages, higher travel costs, visa fees and lower efficiency when companies hire new people to answer questions. “
Some reports indicate that a recession could hit the US, and similar fears could be felt across all industries in India. Information technology stocks have melted away on concerns about a possible recession for their most important market, the United States. Due to high demand despite high inflation, companies today spend a huge amount on digitization. This implies that the IT sector is currently well positioned in a volatile market and economic downturn.
Big Indian tech giants like TCS, Infosys and HCL can do better during this tough downturn.
A recession is generally described as a sustained decline in economic activity that affects all sectors of the economy and lasts more than a few months. In the United States, gasoline and food prices are at record highs, sending inflation to a 40-year high.
If the recession hits the US, customers can continue their digital transformation journey or stop midway. A business that has grown can hardly stop growing. Many reports indicate that IT spending is expected to increase even during an economic downturn, which may not have a serious impact on the industry.
On the other hand, companies in recession do not see significant investment or have no opportunity to increase their profit margins. In contrast, clients during the short and rapid downturn set priorities to boost their business. So even if a recession occurs, the IT services sector will decelerate, but the impact will not be small.
If viewed on the bright side, it is believed that the recession could soften attrition in the computer industry, which is currently at a high level. This implies that the tech giants will be relieved of the problem of employees leaving the company suddenly.
Infosys and TCS stand out among other players in a recession-stricken business. Mphasis and HCL Technologies can also survive difficult times.
Analysts predict that IT stocks will bottom out at higher multiples and then recover to significant sales. India’s IT stocks by TCS, Infosys, Wipro, Tech Mahindra and HCL Technologies have been the focus of Daral Street as global investors and policymakers are separated by whether the world’s largest economy is heading into a recession. increase. This happens when IT companies are already struggling to reduce margins due to increased spending to manage high turnover rates.
Now that many analysts have already warned of the further downsides of IT in the future, concerns about a recession are hunting down investors. The weakness of the rupee (a few inches from the lowest ever against the US dollar) also weighs heavily on investors, as the depreciation of the currency increases the value of the profits of high-export companies such as IT companies from overseas markets.
Is the recession coming, and is there a silver lining?
According to Nomura, there is a high possibility of a recession in the United States. “The Fed’s commitment to restore price stability is likely to drive the economy into a downturn,” the broker said. The company believes that the slightest recession in the world’s largest economy since the fourth quarter of 2022 is “more likely than not.” Nomura expects US GDP in 2023 to shrink by 1% year-on-year.
This is in stark contrast to the previous 1.3% expansion forecast. Nomura believes that the combination of stubborn inflation and the Fed’s “single mission” to contain it will be one of the main drivers of a potential recession. “The Fed’s efforts to rebalance supply and demand to stop price pressures will eventually drive the economy into a mild recession,” she warned. But US Treasury Secretary Janet Yellen believes that a recession in the United States is “unavoidable.”
Her comment came a few days after the Fed announced the sharpest rate hike since 1994. The Fed’s hawkish move to curb US inflation for the first time in 40 years has shocked global financial markets, already worried about possible economic contractions. However, Nomura added that consumer fundamentals have historically remained a solid foundation.
Some analysts are more concerned about the potential recession in the United States, despite India’s strong demand for IT. Deepak Jasani, Head of Retail Research at HDFC Securities, predicts that global IT spending in 2022 and 2023 will increase by 4-7% from the previous 6-8%. This told CNBCTV18.com, despite high demand, as evidenced by the number of vacancies, the size of the sales funnel, the pace of hiring, and the ratio of offers to entries.
” Clients may have a clearer idea of where they stand with outsourcing decisions and programs during a shallow and swift recession. From a service provider`s view, a recession can bring down the high attrition faced by all IT players, allow much-needed streamlining to the cost structure and allow them to improve execution,” he said. When a recession occurs, Jasani believes customers demand cost savings, but this is counteracted by a reduction in variable compensation and depreciation of the rupee.
Should investors worry?
There could be a further correction in the Indian IT space if demand slows down, according to Harsha Upadhyaya, CIO-Equity at Kotak Mutual Fund. He worries that slowing demand for handsets will make things much worse for investors. “The market may be looking at profit margins shrinking and some valuation devaluation, but still not creating slower demand for IT companies.
If you look at sector valuations in IT, they’re still trading close to ‘one standard deviation from the long-term average,’ he told CNBC-TV18. In that case, he said, anything that detracts from momentum would be a disappointment in business, we can see IT companies will correct more mistakes.
edited and proofread by nikita sharma