IT companies should focus on new growth areas

Indian IT industry has been witnessing a stellar run in the last one and a half years. The Covid pandemic-induced digital adoption drive across the world has pushed up the global IT spend, which in turn benefitted both global and Indian technology firms. For the last financial year (FY22), most large firms and mid-tier companies are likely to report double-digit revenue growth. Results of Tata Consultancy Services (TCS), Infosys and mid-tier firm Mindtree already reflect the growth achieved in FY22. However, as we enter into FY23, there is now a cloud of uncertainty that has started to hover over sustaining the momentum. The global market, supply chain, commodity prices are being roiled with an inflationary environment ruling the world owing to the ongoing Russia-Ukraine crisis. Europe as a continent is likely to face growth bumps as uncertainty over assured oil & gas supply to key industrial nations remains uncertain in the near term. Against this backdrop, global consultancy firm Gartner has reduced its global IT spend growth outlook to four per cent in 2022 as against its earlier projection of five per cent. Any economic uncertainty, therefore, is likely to affect clients' decision making on technology spends going ahead. Moreover, inflationary environment is expected to eat into the profits of global enterprises across the world, impeding their ability to earmark more funds towards technology spend.

In such an environment, Indian IT companies may see tapering of hyper-demand environment seen in the last fiscal year. The deal pipeline of TCS and Infosys remained robust. This provides a comfort level that these companies will be able to achieve their growth projections. However, there is uncertainty over the deal flow in the coming quarters, which is critical for sustaining the top line growth. Moreover, cost pressure is already reflected on the operating margins of IT firms. One major reason for such rise in expenses is related to high employee attrition. High attrition is pushing wage cost, backfilling costs and related expenses as IT firms compete in the marketplace to hire and retain good talent in a robust demand environment. Moreover, resumption of travel and opening of offices will also raise expenses on these accounts. Cross currency movement is another matter of worry. Therefore, current fiscal will see pressure on operating margins of Indian IT firms.

To maintain the growth momentum, Indian IT firms are expected to accelerate the pace of automation to save cost apart from tapping new geographies. India as a market has not received the required attention so far by most domestic service providers. But data suggests that digital transformation across industries and the government along with a maturing startup ecosystem is a reality. This throws open exciting opportunities for the Indian IT industry. While many global majors have successfully tapped the Indian market, most domestic IT firms are yet to do so. The likely growth bumps give a chance for looking at India as a lucrative market rather than only a delivery centre. Offshoring is definitely on a rise. This will work as a cushion to supplement growth in FY23. However, the pent-up demand from the pandemic-led IT spend seems to be over. And it will be better if Indian IT firms look for new revenue opportunities to sustain present growth rates.