The Indian IT industry has been a shining star in the current economic scenario, with top companies reporting strong earnings and growth in recent months. However, despite the positive news, the industry is facing a number of challenges and concerns, from global macroeconomic headwinds to rising salaries and the issue of moonlighting. In this post as SEBI Registered Investment Advisors, we will share our view on the trends and concerns facing the Indian IT industry, and what companies can do to overcome these challenges and continue to grow and thrive in the future.
The Indian IT industry has been reporting strong earnings in recent months, with top companies such as Infosys and TCS showing an average increase in profitability of 10%. This increase is partially attributed to the depreciating rupee and controlling employee costs. However, attrition remains a concern for these companies, though it appears to be tapering off. Both TCS and Infosys reported strong deal wins, which is good news for the industry as a whole. Positive growth has been seen across all verticals, with the manufacturing sector seeing the highest growth and the financial services sector seeing the lowest growth. Technology growth is being led by cloud and digital transformation services.
The year started with a struggling IT sector, when most stocks in the sector languished below their 200-day moving averages. This is despite various sectoral indices showing signs of a turnaround. The IT sector is dominated by large global Indian MNCs whose fortunes are closely tied to the global economy, and their main market – the US – is currently facing a potential recession with two consecutive quarters of negative GDP growth. Additionally, the housing sector, which is an important market for IT companies, is seeing a decrease in demand due to high inflation and interest rates. This has led to a more pessimistic outlook for these stocks among foreign institutional investors (FIIs).
The trend for the IT sector was expected to change if the Federal Reserve raises interest rates further. The industry was expected to see a decent Q1 and Q2 due to discretionary spending not being greatly impacted. If this trend continues through H2, most large players could meet the lower end of their FY23 guidance. Such times offer a good opportunity for long-term investors to buy high-quality tech companies at reasonable prices. As a long-term investor, it is important to focus on good quality companies regardless of short-term price fluctuations, as macroeconomics is difficult to predict.
Europe’s Energy Woes
Despite the positive news, CEOs of these companies are cautious about the future due to the ongoing instability in Europe and inflationary conditions in the US and Western Europe. The global macroeconomic headwinds have caused concern among Indian IT firms, with the slowdown in western economies, rising interest rates in the US, and the energy crisis in Europe being the biggest concerns. Clients are also reducing IT spending and cutting budgets, which can slow down decision-making in uncertain environments.
In regards to the energy sector in Europe, IT organizations in Germany will be the most impacted, as data centres require gas for cooling. Other European countries dependent on Russian oil will also suffer due to shortages. European energy companies struggling to survive will postpone their IT projects and investments, which will have an effect on the global IT industry. For Indian IT companies with exposure to energy clients in Europe, there will be a short-term impact as clients in the sector reduce investments in new initiatives, cut down spending, delay projects, and not renew contracts. In the medium to long term, the situation may improve based on how the conflict in Europe develops.
Wage Hikes & Margins
Another concern for the IT industry is the issue of salary hikes and the ability to improve margins. The industry has faced similar situations in the past, such as the dot-com bubble and the 2008 financial crisis, and companies have already implemented initiatives to claw back margins. Some companies are going back to clients to ask for higher rates to offset higher hiring costs, and others are announcing large hiring numbers from colleges. In the medium to long term, the industry will stabilize both in terms of compensation and margin pressures.
Lastly, the issue of moonlighting has become a concern for companies such as Wipro and Infosys, but it is not limited to just these companies. With the rise of remote work due to the pandemic, skilled labour has been given the opportunity to look for new opportunities to use their skills and be rewarded. Companies have had to come up with strategies to engage their employees internally to curb this phenomenon. TCS has announced plans to launch a platform to give employees more opportunities within the company. The future of work is likely to be a hybrid model, and moonlighting cannot be eliminated completely. Companies will have to adapt and create new strategies to ensure employee engagement and productivity.
In conclusion, Indian IT companies are showing strong signs of growth and profitability, with companies such as Infosys and TCS reporting an average increase in profitability of 10%. However, the industry still faces challenges such as global macroeconomic headwinds and concerns about attrition. The energy sector in Europe is also a concern for Indian IT companies, with short-term impacts on clients and projects. The issue of moonlighting is also a concern for companies, but it is not limited to just a few firms. Companies will have to adapt and create new strategies to ensure employee engagement and productivity in the future, which is likely to be a hybrid model of work. The industry will have to navigate these challenges to maintain its growth and profitability in the coming years.
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