IT companies are bracing for a recession in key markets

As analysts anticipate a recession in the U.S. and Europe, spurred by aggressive monetary tightening to control inflation, India’s information technology industry could witness a slowdown in client spending.

Still, the digitisation push that started in the Covid era will remain a priority for enterprises even in times of recession, according to heads of India’s two mid-sized software services providers.

But the IT playbook against recession has changed this time around, where large contracts do not necessarily guarantee refuge from headwinds, according to Nitin Rakesh, managing director and chief executive officer at Mphasis Ltd.

Clients are looking to squeeze spending in areas like managed services, which traditionally have been havens in past turbulent times, Rakesh told BQ Prime’s Niraj Shah in an interview. The priority now lies with the big transformation and change initiatives, he said.

“The playbooks from 2008–09, and to some extent 2013–14, were really all around managed services. Large contracts are a safer place to be for companies in our industry, whereas discretionary spend will get cut first, and it was equated with application development,” he said. “I think that pivot is different this time because managed services… is the first place where at least our enterprise clients are looking to squeeze costs.”

“Hybrid or multi-cloud infrastructure, data modernisation, consumer experience, and cybersecurity” form the list of priorities of IT companies as of now, along with the cost to deploy these initiatives, said Rakesh.

Growth at any cost is not the motto to follow, according to Sandeep Kalra, CEO of Persistent Systems Ltd.

“There’s a rule of 40. It is basically your growth and your Ebitda put together; if they’re greater than 40, you’re golden. Now growth is not going to come, so you need profitability and you need sustainability through this at a lower growth,” Kalra said. “It’s even more important that you globalise and work with people who can help you on that journey.”

IT Sector On A Cusp Of Investment Super Cycle
The tech companies are in the early stages of an investing super cycle that started in earnest only in 2021, according to Rakesh.

“Every part of the tech infrastructure is getting renovated, with cloud and data as the two core theses around which the entire renovation is happening. I don’t think we’ve seen this kind of renovation since tech became omnipresent in enterprises 50 years ago,” he said.

The digital overhaul at enterprises is likely to continue despite headwinds, with verticals like managed services bearing the brunt.

“There was a good amount of digital transformation journey that started in the Covid era. A lot of those are long-range programmes. Those are not things that people will just pause in the middle of and then revisit after a few years,” said Kalra.

“The next three to four quarters are going to be more challenging. After that… the long-term investments will continue. Whatever discussions we are having with our customers, they are looking at deprioritising some of the business as usual activities, but they are not deprioritising long range,” he said.

From this perspective, the imminent slowdown is likely to be shallower than what has been seen in the past, Kalra said. Bloomberg