Demand for IT companies to remain strong for next 18 months, experts say

Even as information technology (IT) services firms claw back variable payouts amid margin pressure, the overall demand environment is likely to remain steady for the next 18 months, industry analysts told Moneycontrol.

IT spending cycles may be delayed, but clients’ spending on technology over the next 18 months is expected to follow a stable pattern, they said.

A survey by investment firm Wedbush Securities shows that IT companies’ clients maintain a positive intent to spend on technology both in the second half of the calendar year 2022 and in the first half of 2023.

The survey studies 205 US -based enterprise buyers with representing high-tech, financial services, manufacturing, and Retail verticals.

While a slowdown may be expected in some functions, the survey said it is likely there will be strong funding for multi-year digital transformation initiatives at least for the remaining months of 2022, assuming there are no major disruptions in global economic activity.

"While the survey looks bullish for the next 18 months (2HCY22, CY23), we see a more realistic scenario, where next year’s budget cycles may be slightly delayed, a function of a combination of slowing economic activity as well as enterprises possibly reassessing post-pandemic spending priorities, resulting a in a back-end loaded CY23 for IT spending," Moshe Katri, leading IT analyst and managing director of equity research at Wedbush Securities, wrote in a note.

Shrinking margins amid rising fears of a global economic slowdown have battered IT stocks to three-week lows. The BSE IT Index lost 3.6 percent in the last four sessions of the slump. It is down 22 percent so far this year.

Rich valuations and an anticipated slowdown in IT spending, given rising inflation and a likely slowdown in global growth, has built pressure on IT stocks.

Transformation projects still on 

 Forrester Research India’s Head of Research Ashutosh Sharma told Moneycontrol that the regions where IT companies draw most of their clients—Europe or North America—are experiencing a recessionary impact during which time clients look to save on costs.

"They look at being more lean and efficient in their overall cost structures. One of the key areas that they refer to is technology spending because it is actively becoming really important for organisations to get that right. One of the ways they actually manage costs is by outsourcing more or offshoring more," he said.

Still, these are times of growth for clients, and bigger transformation projects are on.

"Even if they have to cut down on costs due to recessionary forces, they cut down on other discretionary spending," he said, adding that there is no linear relationship between gross domestic product (GDP) growth in these economies, their technology spending cuts, and growth of IT service providers.

Budgets on track  

HDFC Securities’ Deputy Vice-President Amit Chandra told Moneycontrol that IT spending, which was considered to be discretionary, has now become more non-discretionary. Any slowdown in spending will also vary from sector to sector.

"There are certain pockets where you can see some kind of weakness, such as retail experience or some futuristic projects, those can get a bit delayed. But in terms of the total spend, for the BFSI (banking, financial services and insurance) sector and from large banks, despite moderation in revenue we have not seen any cut in IT budgets," he said.

Chandra said that while there is talk of a recession, there have been no signs of any reduction in capital expenditure yet by the larger companies.

"The headlines gathering around hiring freezes are happening in the US because there is a huge gap between demand and supply there. Because of that, companies don't want to hire at a very higher cost," he said.

Spending on specialised services to be higher

Mrinal Rai, Principal Analyst at technology research firm ISG, also maintains that there is a slowdown only in limited projects that were traditional service lines for IT companies -- such as data centre consolidation, traditional ERP, etc.

In terms of spending, he expects a reduction in regular managed services,  which are being taken over by automation and newer skills.

Rai added that spending on specialised services will be higher than what it was earlier, as clients are now signing contracts based on outcomes and business process results rather than a service-level agreement that is measured on certain fixed indicators.

"Technology is able to showcase the differentiation it is bringing to an organisation’s final output," he said.

"Any kind of slowdown or economic downturn has anyway helped in the growth of this industry in the past. We are hopeful that because of these factors, the spending would increase or at least would remain high, but not for the traditional service lines," he added.