Slowing Spends Cast Shadow on India’s IT Services Industry, Says Gartner

IT services market globally to cross $1 trillion in 2019, but growth rate to slow to 4.7%, says Gartner.

IT services spending worldwide for the first time is projected to cross $1 trillion (Rs 73.5 trillion) — in 2019 — but that does not call for a celebration for the export-driven IT services industry in India as yet.

The reason is, the market, which is bogged down by an anticipated slowdown in global economies and currency volatility, as well as trade wars, is expected to grow at a slower rate of 4.7 per cent in 2019 as compared to 5.9 per cent in the previous year, according to research firm Gartner.

This comes at a time when the Indian IT services industry is putting in all efforts to gain the growth momentum and return to double-digit growth but has seen limited success so far. Other than industry leader Tata Consultancy Services (TCS), none of the leading Indian IT majors is yet to achieve the double-digit growth mark.

According to Gartner, overall IT spends, including spending on IT services software, computer hardware, data centre systems and communications technologies, are expected to grow slower at 3.2 per cent in 2019 to $3,816 billion as compared to 4.5 per cent clocked in 2018.

Within that, spending on IT services, where Indian players such as TCS, Infosys and Wipro play a big role, is the second-largest segment with a share of 27 per cent.

The projection by the global research firm comes at a time when Indian IT industry body Nasscom has given a conservative exports growth guidance of 7-9 per cent for 2018-19, which is not much different from the 8.4 per cent growth the industry logged in the previous financial year. Infosys, India’s second-largest IT services company, which delivered better than expected numbers in the September quarter, has still held on to its original guidance of 6-8 per cent (in constant currency).

Even though Indian IT services industry accounts for just around 12 per cent of the overall IT services opportunities with revenues of $126 billion in FY18, the sector still holds the lion share in the global IT offshoring market which is pegged at around $300 billion.

Giving the rationale behind the likely slowdown, Gartner said that dip in global growth rates and cost optimisation pressure on the clients will hurt the IT spends.”An expected global slowdown in economic prosperity, paired with internal pressures to cut spending, is driving organisations to optimise enterprise external spend for business services such as consulting,” the report said.

A study done by the global research firm also says that 46 per cent of enterprises have indicated to consolidate their IT services supplier base as one of the effective measures to optimise cost.

“All the factors indicate that overall, the market is moving nowhere. It is rather stable. So, the hopes of higher growth in IT spending is not coming back in the near future,” said Pareekh Jain, managing director, India, at HfS Research. “Secondly, the digital services pie is also eating into traditional services business while the overall market remains nearly flat.”

Besides, some of the global enterprises are also resorting to in-sourcing through their global in-house centres (GICs) which is affecting the overall outsourcing opportunities.

These factors have also prompted both Indian as well as global IT services players to give conservative guidance. For its financial year 2018-19 (follows July-August cycle), Accenture has guided for a revenue growth of 5-8 per cent in constant currency (CC) term, much lower than 10.5 per cent it reported last year, factoring in the impact of a stronger dollar apart from uncertainty around Brexit and trade wars.

However, Indian IT services biggies such as Tata Consultancy Services (TCS) and Infosys have given no indications of slowing growth in IT spends in coming quarters. Rather, these firms are closely watching the developments.

NG Subramaniam, chief operating officer of TCS, had said that it would be too early to gauge how client spending would pan out in the coming year. “I think our customers are closely watching out what is happening, but at this point in time it is too early to call with respect to how it (trade war) is going to percolate it into the budgets for the next year,” he told analysts in the post earnings call.

Some industry watchers say that it may be too early to say that the IT spending will come down in the coming year given the strong growth some of the Indian players have reported in key geographies like the US and Europe.

“When the largest market for IT services, US, is growing at more than four per cent and all IT services firms both in India and globally are reporting sound earnings, we should rather wait for any conclusion,” said Mohandas Pai, former CFO of Infosys, and Chairman of Aarin Capital. – Business Standard