US banking crisis may slow down Indian IT growth with sharp drop in tech spend

Indian IT companies are likely to log in slower growth in the first half of 2023 in the wake of the banking crisis in the West and, in turn, a moderate growth for the fiscal year 2024, according to a report of Kotak Institutional Equities.

The report suggests that this could lead to a reduction in discretionary technology spending in the short term. “Spending on cost take-outs will pick up but will yield benefits in 2HFY24 or later… Expect further polarisation of growth between winners and losers in FY2024,” it said.

According to the brokerage, discretionary spending cuts may result in a pause or slowdown in the implementation of digital and cloud programmes soon.

“We expected a growth slowdown in FY2024 to play out in the form of a weak March 2023 quarter, followed by a moderate uptick in 1QFY24 and normalisation in 2QFY24. Current woes in the banking sector can impact sequential growth by 1-2 percent in 1QFY24,” Kotak said in a note to investors.

“This assumes quick resolution to the global banking crisis and problems remaining localised to BFS. Our current growth forecast for leaders, for FY2024, stands at 8 percent, which may get impacted by 1-2 percent due to the current crisis. A full-blown recession will have a bigger impact,” the note said.

The brokerage firm predicts that a reduction in discretionary spending will affect all companies, but TCS and Infosys are better positioned to handle this impact among the tier-1 IT companies. HCL Technologies and Tech Mahindra will be less affected due to their lower exposure to BFS.

Mid-tier companies such as LTIMindtree may benefit. However, Mphasis may face challenges in the near term due to its significant exposure to the impacted mortgages sub-vertical and outsized exposure to BFS. Cognizant Technologies and Wipro are vulnerable among the Tier-1 IT companies, with the latter facing higher vulnerability due to its significant consulting exposure.

In recent times, BFS firms have been investing heavily in cloud migration and technology upgrades to transform into cloud-first and data-driven organizations. This initiative is aimed at enhancing customer experience, reducing inefficiencies, improving productivity, and better competing with digital natives, the Kotak report said.

Most large US banks had reasonable tech budgets and a positive outlook on tech spending for CY2023. The ongoing crisis has driven the BFS sector in developed markets into a rough patch. The top priority for these banks now is to survive the crisis and maintain adequate liquidity and capital adequacy, which will lead to a more cautious approach to spending. Consequently, tech budgets that were planned at the beginning of the calendar year may need to be reduced to align with the increased risks faced by the sector, according to Kotak.

Increased focus on cost reduction measures will create opportunities for application rationalisation, greater offshoring, captive carve-outs, automation, and vendor consolidation. However, if spending on risk and compliance, as well as M&A integration, increases, it may limit the available budget for discretionary programs. The benefits of this counter-cyclical spending will be realized in the future. Companies that can capture both discretionary spending and cost take-outs will ultimately benefit and gain market share, the report added. Moneycontrol