Could India’s IT companies face a demand slowdown in coming quarters?

Indian IT services companies are likely to see a slowdown in demand in the second half of this fiscal year, according to some analysts and brokerages.

This is because clients are prioritising spending towards projects with quicker return on investment and increasing focus on cost optimisation, according to an analyst report cited by The Financial Express.

Why is this slowdown happening?

While growth in Europe was healthy during the September quarter, management commentaries suggest that discretionary IT spending in the region is likely to reduce in H2 FY23 due to the uncertain macro environment. 

For example, the management of Tata Consultancy Services (TCS) indicated that while its book-to-bill has improved in Europe on a sequential basis, the timeline to convert to qualified pipeline has elongated, implying potential delay in deal conversions in next few quarters.

Have Indian IT companies changed their guidance?

Both Wipro and Cognizant Technology Solutions have lowered their revenue growth guidance for Q3 and 2022, respectively. Wipro expects revenue for the third quarter ending December 31 to be in the range of $2.81-2.85 billion. This translates to a sequential growth of 0.5-2%, lower than the 3-5% it had guided for the September quarter.

Nasdaq-listed Cognizant, which follows the calendar year, lowered its full-year 2022 revenue growth guidance to 7% in constant currency to about $19.3 billion.

Infosys revised its full-year revenue growth guidance upwards to 15-16% in constant currency from 14-16% earlier. HCL Tech also revised its guidance to 13.5-14.5% from the earlier 12-14% y-o-y.

“However, given healthy revenue growth for Infosys and HCL Tech in H1 FY23, the guidance implies soft revenue growth in H2 FY23 as companies factor-in furloughs in line with historical trend and slowdown in spending due to the challenging macro,” the report said.

What does the report say further?

Analysts at a brokerage said areas of weak demand widened further in Q2 FY23. The Infosys management pointed to emerging weakness in the telecom and hi-tech verticals, especially in discretionary spends, apart from the slowing demand in retail and mortgage called out in the previous quarter (Q1). 

Additionally, moderation in hiring across the IT pack for second consecutive quarter also implies that companies in the sector are baking in demand slowdown in H2 FY23 and FY24, the analysts said