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Recession, forex volatility impacting India IT sector

Re fall to augur well for Indian IT cos, which earn over 50% of their revenues in greenback; Accenture’s Q3 performance indicates mixed bag for Indian IT industry as it recorded 6.7% y-o-y growth in new bookings, which were at $7.8 bn for outsourcing business

Recession, forex volatility impacting India IT sector
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Recession, forex volatility impacting India IT sector

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Cost Optimisation

- Clients prefer higher offshoring

- Global industry turns cautious amid recession fears

- New orders declining

Bengaluru: The third quarter results of Accenture indicate that Indian IT industry may see a mixed bag of performance in coming quarters with fears of recession and currency movement playing spoilsport in FY23.

While revenue growth in the near-term is likely to be robust, cost optimisation moves by clients may favour higher offshoring. However, moderation in order book growth by Accenture in its outsourcing segment doesn't augur well for the Indian IT services sector.

For the third quarter of Accenture, its new bookings were at $7.8 billion for the outsourcing business, a growth of 6.7 per cent year-on-year basis.

"The new bookings reported growth for the quarter, but we observed a deceleration in new bookings for outsourcing business, especially in the last two quarters. Historically, we have seen their correlation with revenues with some lag effect. Unless new bookings pace picks up, we may witness revenue growth slowing down YoY, going forward," ICICI Securities wrote in a note.

During the quarter, Accenture's outsourcing revenue, which is a proxy to Indian IT services business, grew lesser than its overall revenue growth.

"We believe that outsourcing revenue slowdown and market share gain for Accenture is not a good news for Indian IT companies, which may also witness slower revenue growth from second half of FY23 onwards due to possible tech spending cut from some its large clients in US and Europe," the brokerage firm added.

However, the management of Accenture has indicated that companies in developed economies have begun cost optimisation moves amid slowdown fears. Historically, recessionary environment leads to more outsourcing, which is a clear positive for Indian IT industry.

"Accenture continues to emphasis 'compressed transformation' imperative for clients, strong pipeline and 'no change in decision making patterns' although suggests that 'cost optimisation' is also gaining currency in client priorities, which should augur well for offshore techs," JM Financial wrote in a note.

Meanwhile, the impact of currency movement is evident from Accenture's growth projections. The IT services giant expects a negative foreign exchange impact of 4.5 per cent in fiscal 2022, worse than its previous forecast of a three per cent forex hit. Companies like Accenture, IBM, Cognizant are likely to face headwinds coming from a strengthening dollar against all major currencies of the world amid an inflationary environment.

However, it augurs well for Indian IT companies which earn more than 50 per cent of their revenues in dollar. A weak rupee translates into better revenues in reporting term apart from adding to the operating margin.

Debasis Mohapatra
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