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Cost pressures force EU companies to delay IT deals

The energy crisis in Europe and macro-economic headwinds are weighing on the outlook for IT service segments like retail, manufacturing and automotives, analysts said.

There has been a slowdown in decision making across these sectors, especially in Europe, said IT consultancy firm ISG.

Firms across the European Union (EU) and UK are under severe cost pressure, other analysts said.

Europe accounts for over 25% of the revenue pool of Indian IT service providers like Tata Consultancy Services (TCS), Infosys, and Wipro among others, with many of them dealing with global retailers, manufacturers and automakers in the region.

In August, inflation in the euro zone touched 9.1% due to spiralling fuel prices, forcing many small businesses to suspend operations. However, Indian IT service providers generally engage with the larger companies in this space.

“Based on insights from our data, we are witnessing a slowdown in decision making for sectors like retail, manufacturing and automotives,” said Mrinal Rai, principal analyst, ISG.

The energy crisis is expected to get worse in winter.

“However, we have maintained that all the critical business decisions and business transformation projects will go on irrespective of the larger concerns,” Rai added.

IT midcaps like Zensar have already forecast pressure on retail and manufacturing segments, while Accenture’s realignment of talent supply has made experts concerned about the ability of IT services clients to spend.

Analysts have also flagged client-specific delays in segments like telecom and high-tech verticals —consumer electronics, telecom operators, and telecom infrastructure – which will impact companies like Larsen & Toubro Engineering Services.

The EU and UK may already be in the throes of a hard landing and their firms are under severe cost pressure, said Peter Bendor-Samuel, chief executive of Everest Research.

This could impact margins from the business in that region, he added.

“Pressure to reduce prices and any pricing concessions will put significant pressure on margins of IT service providers at a time when wages continue to rise both in India and in the EU and UK,” Bendor-Samuel said.

Other measures can be taken to mitigate the impact, such as reducing variable compensation, moving more work to India and increasing the percentage of freshers in the mix, he added.

These concerns were first flagged by Mindtree during its first-quarter results, when it pointed out that clients had been impacted by the Russia-Ukraine conflict and supply chain issues emanating from China, which were impacting retail and the Consumer Packaged Goods verticals across UK and Europe.

Outsourcing firms to benefit
However, Indian IT service leaders including TCS, Infosys and Wipro will continue to be in a sweet spot due to a preference for outsourced solutions during uncertain economic activity.

Consulting is more susceptible to economic downturns than outsourcing and Indian IT services firms have far more exposure to outsourcing than consulting, said Ravi Menon, IT and technology analyst, India, at Macquarie Group.

“So, I wouldn’t expect retailers to cut back unless they are facing bankruptcy and slashing all spending. There are a couple of them who are in dire straits and these client exposures are rather small for Indian IT in aggregate,” Menon said.

The brokerage does not expect any meaningful impact on revenue growth in the July-September quarter from any current macroeconomic concerns, he added.

Elara Capital has not seen any impact of the Ukraine conflict in the numbers, said Ruchi Burde Mukhija, vice president of technology and internet equity research at the brokerage.

“If companies show weakness in the September quarter, then it will definitely not be the first instance,” she said.

The September quarter will be largely on expected lines, but beyond that, there could be more trouble in terms of furloughs and there will come a point where visibility starts to diminish rapidly, she added. Hostingsignal

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