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IT will continue to receive tailwinds from strong deal activity and digital transformation

A potential economic slowdown in end markets should only have a modest impact on revenue growth for Indian IT companies, says CLSA

June 23, 2022 / 01:29 PM IST
 
 
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The Indian IT industry is likely to sail through global economic challenges at least in the first quarter of the current financial year, going by views of CLSA which are based on the global brokerage firm's recent interaction with offshore advisory company ISG.

Optimism about a strong show in 2022

CLSA feels the deal momentum has remained strong across geographies and business verticals, though there were some instances of minor delays in decision-making in some parts of Europe and in the manufacturing vertical across many geographies due to rising input costs and supply chain disruption in China.

However, IT budgets are not likely to witness any cuts and may remain stable despite risks from macro-economic factors. Any impact on the budgets may likely start percolating only in 2023. The optimism also stems from the fact that all enterprises recognise the importance of technology to achieve their business objectives which is likely to cushion the impact from a hardening business environment.

“ISG expects a 5.1 percent year on year growth in managed services annual contract value in 2022, twice the historical average,” a note from CLSA said.

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Pricing remains stable

Macroeconomic concerns so far have not had any impact on the deal pricing and commercial negotiations and vendors have been successful in passing on the 4-7 percent increase in billing rates for time and material based projects. However, the pass-through has been higher at 15 percent for skills that are in huge demand.

Attrition continues to hog the limelight

Increased attrition across the sector has been a major cause of concern not only for the IT companies but also for the end consumer which is faced with delays in transition in managed services deals and also in start of new projects.

CLSA is of the opinion that attrition may have likely peaked out but is likely to remain elevated in the near to medium term.

The customers are also apprehensive about productivity levels of fresh hires that the companies have recruited directly from the campus to overcome a paucity of resources. The productivity levels of these fresh hands is a key monitorable for the customers as they see the scalability of production as a major cause of concern for timely implementation of projects.

Digital makes the difference

With the technology assuming greater importance to achieve business growth and other business objectives, the note from CLSA says that it is very much likely that a cut in IT spends by the businesses will be the last priority. Also, with most organisations in initial phases of the cloud/digital transformation journeys and witnessing constant evolution of technology, their dependence on external service providers has increased more than ever. This augers well for the Indian IT companies which are leading the digital transformation for businesses across geographies.

Outlook

CLSA in its note reiterated that “a potential economic slowdown in end markets should have only a modest impact on revenue growth for Indian IT companies”. However, the EPS (earnings per share) estimates might see a bit of a trimming due to the sharp cross currency moves witnessed during the current quarter as macro uncertainties remain an overhang on the valuations of the sector.

The global brokerage bets strongly on Infosys due to its higher growth visibility and it finds Tata Consultancy Services stock attractive, “given its skills in structuring large cost-takeout transactions and strong margin defence”.

Also, the risk-reward for HCL Technologies now looks attractive given its strong FY22 exit order book, healthy free cash flow yield and correction in its valuations as the stock is trading 30 percent below its 52 week highs.

Disclaimer: The views and investment tips of investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

 

 
Gaurav Sharma
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