Current market volatility may hit IT spending in 2015

Despite positive signs from most quarters, the Indian information technology (IT) services sector might see problems across some business verticals in 2015, clouding client spending during the year.

Among other things, some experts have concerns on banking, the largest vertical for most Indian IT service companies. There are concerns around large banks incurring heavy fines in the US, brokerage firm Motilal Oswal said in a report earlier this month. Additionally, several of the top 10 clients in the banking space in the US are looking to set up captive units and lower their exposure to outsourcing, which could further hit Indian IT services firms. Sectors such as retail and energy, growing at a strong momentum in recent quarters, might also see some slowing. Retail is anticipated to grow slower as the budget of clients in this sector depends heavily on the success of festive season sales – these have not done very well, Motilal Oswal said. Also, the sharp decline in oil prices is seen affecting energy companies negatively.

"Our recent interactions with top-tier IT companies suggest that due to multiple incremental developments over the past couple of months, various verticals are entering the budgeting period with specific headwinds," Motilal Oswal said in its report, titled 'Technology: Under the weather'.

While concrete clarity on clients' budgets will come only by end-January 2015, Motilal Oswal said its observations were based on indicative trends.

The current low visibility due to concerns of banks in the US being subjected to heavy fines, due to Libor rigging, sanction busting and forex manipulation, will have a bearing on the spending plans of companies here for the next year. The banking and financial services vertical contributes the largest chunk of the sector’s revenues. “As a result, the industry will remain in wait-and-watch mode till further clarity emerges on the nature of budgets, especially in top accounts. Currently, the visibility of spending going into the next year remains dim, clouded by multiple such issues on the surface,” the report says. First-time outsourcing by many large organisations from continental Europe, investments in digital technologies to drive differentiation and structured outsourcing in engineering services are expected to be on the upside next year.

“Investments in digital have picked up across the board among top-tier Indian IT. Even for continental Europe, Tata Consultancy Services has been ahead of the curve in terms of penetrating the region. Wipro has appointed a separate head for that region; for all other geographies, it has a verticalised structure, highlighting its focus. Infosys, too, has been focusing on emerging growth regions, with a ‘growth markets’ unit set up to address the opportunity there,” the report adds. It also throws light on engineering services outsourcing, expected to grow faster than the IT sector.

As always, the budgetary outlook of the top clients will turn out to be the largest indicator of growth in the sector. Though a negative indicator on those lines will be a dampener, the report says it need not necessarily “spell curtains for near to medium term valuations”.

This is because the prevalent situation involving the volatility of commodity prices across the globe could improve through the course of the year. This could lead to a pick-up in discretionary spending. Further, there are chances of the current rupee-dollar rates improving next year. The top IT companies of India will continue to portray a mixed picture. While Tata Consultancy Services (TCS) is likely to continue to deliver industry leading growth, its current visibility for FY16 is relatively lesser. Infosys is likely to continue trading at a value lesser than that of TCS. Wipro, on the other hand, will be an attractive bet if the valuation gap widens from the current estimates. While HCL Technologies could benefit from its presence in the engineering services segment, Tech Mahindra is likely to deliver good results with stable profit margins, the report added.

A few other analysts, however, continue to hold a positive outlook for the sector in 2015. “It is very early to talk about anything negative because none of the companies have raised a red flag or concerns regarding next year's budgetary plans,” said a Mumbai-based analyst, who did not wish to be named.