Newsroom International

India's IT Sector Under Intense Pressure in the Short-Term

24 April 2023 Written by Staff Writer

India's technology industry has faced challenges in the wake of the banking crisis and economic concerns in the US and Europe. Asia's third-largest economy relies on these regions for revenue, which has led to fears of a slowdown in Indian IT growth in the first half of the country's fiscal year from April to September. Discretionary IT spending cuts have also contributed to a lack of visibility on near-term demand. The slump in Infosys' share price earlier this month had a knock-on effect, with investors retreating and weighing on other listed IT companies in India. Infosys' weak outlook followed market leader Tata Consultancy Services' lacklustre quarterly report, leading analysts to expect more pain for the IT sector in the near future.

Infosys, India's second-largest IT company, reported results that came in below analysts' expectations for the quarter to the end of March and issued a dismal outlook forecast. Unplanned ramp-down of projects, delays in decision-making and some one-off revenue impacts, including a few client-specific project cancellations, hit revenue growth. Infosys reported a net profit of 61.28 billion rupees for the January-March quarter, while analysts had expected 66.24 billion, according to Refinitiv data. It also missed revenue forecasts. Meanwhile, it projects revenue growth of 4 per cent to 7 per cent in the current financial year, which runs until the end of March 2024, compared with analysts' expectations of 10 per cent.

The sector generates a quarter of its revenue from the banking, financial, insurance and services sectors in the US and Europe. In a research note last month, JP Morgan Chase warned that “the collapse of Silicon Valley Bank, Signature Bank and concerns of liquidity across US and the European Union can further soften tech spends by banks over the short term in a year with slowing growth in bank tech budgets”.

However, analysts are largely optimistic that the long-term prospects of Infosys are still very much intact. “Overall, we believe that sector growth prospects are likely to be muted for the near term but a growth bounce-back cannot be ruled out in [the second half of the year] — unless major macro risks unfold in US or Europe,” says Sandeep Gogia, managing director of investment banking at Equirus.

The IT sector has received a boost from global spending on technology and India's own domestic digital push over the past couple of years. It accounted for 7.4 per cent of India’s gross domestic product in the financial year to March 2022, and it is projected to contribute 10 per cent to the country's economy by 2025, according to data from the India Brand Equity Foundation. In the financial year to the end of March 2023, the industry's revenue is estimated to have hit a record high of $245 billion, according to the National Association of Software and Services Companies (Nasscom). The sector has directly employed more than five million people, Nasscom's data shows.

Despite the short-term headwinds, analysts remain positive about the long-term outlook for India's IT sector. “The world needs tech and that would lead the sector's growth going forward,” says Prashanth Tapse, senior vice president of research at Mumbai-based Mehta Equities. Management commentary suggests that the pipeline of projects is strong, but the conversion is taking a little longer. Once digital transformation and cost optimization regain momentum, the sector is expected to do well.