Slowdown in US economy threatens TCS, Infosys, Wipro

New Delhi: Concerns about a slowdown in US economy poses the biggest risk to India’s $167 billion information technology (IT) outsourcing industry as experts fear Fortune 1000 companies may cut spending on technology, hurting Tata Consultancy Services Ltd (TCS), Infosys Ltd and Wipro Ltd. Demand for digital services, which includes data crunching and artificial intelligence (AI) powered platforms, is still linked to the overall health of an economy, they say.

For this reason, analysts will be closely monitoring management commentary from homegrown IT firms on the growth outlook for the companies when they report earnings starting next week. Mumbai-based TCS kicks off the earnings season, when it reports its results on 10 January, followed by Infosys a day later and Wipro on 18 January.

“If the economies of the world are going to suddenly change in terms of their performance, it will certainly have a bearing on enterprises and, as a consequence, on technology companies. I can see that correlation translate at some level,” Nasscom chairman Rishad Premji said in an interaction with Mint last month. “So, if the question is ‘if economies of the world are not doing well, will corporations continue to spend on digital?’ I would submit no. So, for now, there’s no decoupling (between economic growth and performance of IT firms).”

Over the last two months, many economists and brokerages have flagged that the US will slow down in 2019.

Economists at Morgan Stanley expect a 2.3% growth in the current year from an estimated 2.9% growth in 2018.

US accounts for bulk of business, between 55% and 70% for the five largest companies, including TCS, Infosys, HCL Technologies Ltd, Wipro and Tech Mahindra.

A weak growth could derail the uptick witnessed in the IT outsourcing industry in the past 12 months, an uptick in larger technology contracts getting outsourced and most companies awarding work that was earlier done internally to its vendors. The first six months of the current fiscal saw Indian IT companies adding more employees and raising salaries of some of them by as much as 40%.

“We need to wait and see how all of this impact the client budgets (technology spend) in the coming two-three months,” a Wipro executive said on the condition of anonymity, as the company is in a silent period ahead of its earnings.

Digital accounts for less than a third of overall revenue at each of these companies, and that explains why any slowdown in the US will hurt growth at these companies.

“We believe a key question for Accenture, and the rest of our IT services coverage, is how defensive is its business model in the face of slowing global GDP, or even a recession,” Keith Bachman, an analyst at BMO Capital Markets, wrote in a 20 December note. Bachman maintains that “consulting projects would be “aggressively cut in a recession”.

Bachman made the observation after Accenture Plc declared its results. At least two analysts quizzed the management on the impact of a macroeconomic slowdown on company’s growth during the management’s post-earnings interaction with analysts.

“[W]hen it’s raining hard, either you watch the rain or you build an umbrella. At Accenture, we decided to build an umbrella. And what the umbrella is made of, if you will, probably seven key elements which I truly believe are making Accenture more resilient and more durable across different cycles,” said Pierre Nanterme, chief executive officer, Accenture on 20 December.

Accenture claims that over 60% of its business comes from newer technologies and digital and maintains that the firm will be a beneficiary.

“[I]n Brazil, they say how are you (Accenture) growing double-digits in Brazil, with terrible economic conditions? Because in Brazil, we are the number one. We are the market leader. And when times are tough, you remember the flight to quality. I would use the same comparison which is flight to leadership. When times are tough, clients are going to the leader with all the characteristics we have and the values,” said Nanterme.

On Thursday, share prices of TCS and Infosys fell 1.39% and 0.26%, respectively, while that of Wipro rose 0.09% on the BSE. The benchmark Sensex lost 1.05%, or 377.81 points, to end the day at 35,513.71.