Will recession fears hit IT spending?
BENGALURU: Though CEOs of top IT firms in India said the demand environment looks good in the present quarter, from client spending to margins and attritions, almost all firms have started seeing headwinds. A potential macro slowdown can affect the EBIT margins of IT companies. IT firms’ margins already came under pressure in the first quarter and executives attributed it to supply-side pressure.
Infosys’ operating margins in the first quarter were at 20%, a drop of 150 basis points compared to the previous quarter. Infosys CFO Nilanjan Roy said the major components of the sequential margin movements were headwinds of 1.6% due to salary increases, 0.4% due to a drop in utilisation, and 0.3% due to increases in subcontractors, third parties and other costs.
The IT company at an earnings call said that they are seeing some slowness in the mortgage industry and lending business due to increased interest rates and that they remain watchful of the impacts of emerging global developments on the budget for clients.
“The steady decline in operating margins has been going for several years - perhaps accelerated by a recent spike in attrition. It is because many Indian IT companies have not completed the shift to new capabilities around digital transformation which are not only high growth but higher priced,” said Ranjit Tinaikar, Global CEO, Ness Digital Engineering.
According to Tinaikar, there will be a slowdown in overall IT spending as the new budgets get finalised by Q4 2022. However, spending on new digital products/platforms for transforming businesses will continue to grow rapidly.
Wipro’s Q1 operating margins were lower at 15%. “The inorganic bets we made to accelerate our growth are presently diluting our margin by 2.3%, and at 15%, we believe we have bottomed out,” Wipro CEO and MD Thierry Delaporte said. Even as the world heads into a likely recession, according to experts, the IT industry is continuing to experience strong demand.
“We have strong evidence to suggest that it will likely continue to enjoy stronger demand than the broader economy. We may see demand soften but still stay relatively strong when compared to other sectors,” Peter Bendor- Samuel, CEO of Everest Group, a research firm, told The New Indian Express.
“The significant complication for the industry is that it faces a tight labour market with the accompanying attrition but increased resistance to price increases, placing the service firms in the uncomfortable position of not being able to fully pass on their cost,” he said. He added that this in turn is putting pressure on margins, and will likely continue to do so as the recession deepens.
Indian IT firms may not have to face the challenge of the US recession in the short term, as they have a robust pipeline in the making, said Yeshab Giri, Chief Commercial Officer, Staffing & Randstad Technologies, Randstad India.
With the industry attrition average touching 20%, companies in this sector should continue to seek top talent skilled in automation technologies, cloud computing, analytics and AI and offer attractive non-monetary incentives to induce retention.
“This talent is essential for organisations to scale and navigate a period of high growth that usually follows a recession period. Many organisations are also going to the campus to balance out the cost of hiring and retention,’ he added.