Five Things To Watch For In Indian IT Industry In FY20

Indian information technology sector ended the last fiscal with better growth even as margins came under pressure. Largest of the software services providers will be among the first to announce first-quarter results in early July.

But as we move into the earnings season, here are the five key factors to watch for in 2019-20.

Digital Becomes Mainstream

Digital services are expected to drive growth.

For India’s two largest software services providers Tata Consultancy Services Ltd. and Infosys Ltd., this stream of revenue grew 40-50 percent in FY19, contributing to nearly 30 percent to the consolidated top line.

Automation, cloud technology and mobile architectures-led mainstream adoption could lead to a growth of 30-35 percent in FY20 in digital revenues of IT companies, CLSA said in a recent report. TCS, Infosys and HCL Technologies Ltd. are best positioned to take advantage of this transformation, it said.

BFS Could Get Volatile

Stability of the banking and financial services is crucial as it accounts for 21-31 percent of the consolidated revenues for companies including TCS, Infosys, HCL Technologies and Wipro Ltd. But analysts have flagged concerns.

Kotak Institutional Equities expects technology expenditure from banks and financial services companies to be lower this year. Slowdown in the U.S and Europe, escalation in trade tensions and volatility in equity markets could further adversely impact client sentiment, according to Prabhudas Liladher.

Cognizant has already lowered its guidance for the ongoing calendar year citing weakness in financial services as one of the key reasons.

Change The Business Spends

More funds are now being allocated to the “change the business” processes by clients at the expense of “run the business” allocations, Parag Gupta, who tracks information technology for Morgan Stanley, said in a recent conversation with BloombergQuint.

“Run the business” pertains to running operations consistently to support client businesses, mitigate risks and streamline processes. “Change the business” involves new initiatives and projects, altering the way a client operates business.

One example is firms increasing the pace of investments in digital platforms, mobile applications, data and analytics, artificial intelligence, cybersecurity and blockchain.

JP Morgan indicated that companies are splitting investments allocated between ‘run’ and ‘change’ equally in 2019 compared with 60 percent and 40 percent earlier.

Treading Cautiously In Europe

Europe is one of the largest markets for the top five Indian software services providers with at least 20 percent revenue contribution each. Any weakness in the continent means an adverse impact on the Indian IT sector.

In its earnings report, Accenture and Cognizant indicated slowdown in banking and financial services spends in Europe, while Wipro and Infosys pointed to a delay in decisions on spending by banks there.

Elevated Costs Squeeze Operating Margins

Indian IT firms are hiring more in the U.S. after Trump’s stricter visa policy. And local hires cost 25-30 percent more compared to Indians on H1-B visas, according to Crisil. Infosys and TCS in the past two quarters said the right talent is not easily available, leading to elevated sub-contracting costs.

Moreover, the rupee has been strengthening and since software exporters are paid in dollar, their margins will take a hit. There’s little headroom for margins to expand due to investments in onsite hiring and currency volatility, according to Prabhdas Liladher.

Crisil estimates the sector’s operating margin to decline 30-80 basis points in FY20.