IT analysts in wait-and-watch mode as experts see mild recession in the US

Analysts predict that if a slowdown does happen by 2022-end, the impact will be seen only in second half of FY23

With the recession word again making rounds in the US and with Nomura Holdings saying that America will likely fall into a mild recession by the end of 2022, IT analysts tracking client budgets believe that the Indian IT services industry may see some impact only in the second half of this fiscal.

The US is the largest market for the $227 billion Indian IT services industry. The revenue contribution from America is about 70 per cent for several IT services firms.

“It’s bizarre, but at this time we do not see clients pulling back on spending. That said, we do see some early signs that they are preparing to. For example, we see them talking about shifting focus from modernising IT to IT projects that deliver immediate business value. This appears to be driven by several factors ranging from the fact that the last 5 miles of the modernisation journey are tough due to the rising cost of capital and a growing sense of modernisation fatigue. The prospect of a recession plays into this,” said Peter Bendor-Samuel, CEO, Everest Group.

He added that if things go southward, there is no doubt discretionary spending will be cut and the modernisation movement will slow. “However, given the current momentum, we expect the IT and engineering services market to perform better than most other sectors. So growth will slow but may not go away completely,” said Bendor-Samuel.

“If things slow down, we will see an impact in the second half of this fiscal. At present, clients are relooking at their priorities, and new investments will be revisited. The initial impact could show up in the order books and then on the sales. I personally believe mid-cap IT players will be more impacted,” said Pareekh Jain, founder and CEO of Pareekh Consulting.

Analysts that Business Standard spoke to said there will be limited impact in the near term as FY22 has a good built-up of deals, and the total contract value signed is at a record level. This is especially true for the large cap IT services players for whom FY22 has been an exceptional year in terms of demand.

D D Mishra, senior research analyst, Gartner Research, shared that there are a few cases where customers have raised questions about future spends. But he reiterated that there is no immediate impact on IT budgets.

“If things do head towards a slowdown, then we think the transformational deals may see some impact, especially those that were to begin now. But remember that a crisis has always created opportunities. I think some firms will also take this as an opportunity to look at IT not as cost but as an overall strategy for the company,” he added.

Worldwide IT spending is projected to total $4.4 trillion in 2022, up four per cent from 2021, according to the latest forecast by Gartner, Inc. IT services is forecast to grow 6.8 per cent to reach $1.3 trillion.

Analysts also point out that the Covid has changed the tech requirements of companies and with technologies such as cloud establishing a strong foothold, companies are much better placed to withstand a recession or even a slowdown.

Peter Schumacher, founder and CEO, Value Leadership Group, explains that during Covid many companies invested heavily in shifting applications to the Cloud due to which the are much more agile now. “These companies now have the option to make incremental changes, conduct experiments, give customers real-time offers at very short notice – all aided by machine learning. These new advantages should help companies respond more quickly, effectively and efficiently to the changing economic environment and possibly blunt some of the negative impact,” he added.

Pricing

Other than budgets getting impacted by recession, many would also wonder if pricing will take a hit. In the recent past, due to demand-supply mismatch and dearth of right talent, pricing have gone up.

According to an ISG report, industry talent shortage is affecting pricing on time-and-materials projects, with pricing up by 15 per cent or more. “Attrition is at an all-time high, and providers are having trouble finding people to handle both new projects and the backlog of existing work,” said the report.

Schumacher believes corporate fundamentals are very strong this time around, despite the US stock market dipping into bear territory. In other words, US companies will be entering this economic slowdown from a very strong position.

“Shortages in the labour market are unlikely to dissipate, so pricing should remain stable. How Indian IT services and product firms position themselves in this slowdown will be a key issue to watch. Companies will need to read their customers and the market carefully. Indian companies that do this well stand a good chance of coming out ahead,” added Schumacher.