Ukraine crisis to fuel offshoring demand

Blessing In Disguise

- Situation worsening in East Europe, Ukraine, Belarus

- Utilities in Europe will be affected

- It may lead to client-specific issues in next few quarters

- Near shore centres in the region will be affected

Bengaluru: Indian IT services companies may face a hard time due to ongoing Russia-Ukraine conflict as operations from their East European centres are likely to be affected in the near-term. If the conflict spreads with involvement of major European powers in NATO, this may lead to client- specific issues popping up in coming quarters. For now, energy utilities are the entities that are going to be affected immediately to which Indian IT companies' exposure seems to be low, analysts said.

"In the near-term, more work is going to shift to offshore centres like India as near-shore centres in countries like Ukraine and Belarus are likely to affected due to the conflict. Also, utilities in the European countries will be the first ones to be affected, which may arise to some client-specific issues. Otherwise, Europe as a geography will perform well for the Indian IT services firms," said Pareekh Jain, an IT outsourcing advisor & founder, Pareekh Consulting.

Notably, Indian IT firms have zero to minimal exposure to Russia though many companies have tried to enter that market before.

Russia's President Vladimir Putin ordered the deployment of soldiers to two separatist territories in eastern Ukraine on Monday, February 21 after recognizing these regions as independent. This has raised fears of a real war between Russia and Ukraine. As major European powers depend on the natural gas supplied by Russia, this is likely to affect the supply situation. Already, crude oil prices have surged in the global market owing to fears of supply disruptions. Indian IT companies work for many energy and oil sector clients in the European region and supply disruption due to the conflict is likely to affect their IT spending ability in the near future.

"Indian IT companies are trying to increase their foot hold on the East European countries by setting up new centres. These centres work as near-shore delivery centres for European clients. If the conflict rages, they are going to go slow on expansion or setting up new centres," said Jain.

Some of the largest acquisitions in recent time by Indian technology companies have happened in this region. Tech Mahindra has acquired European Com tec Co IT (CTC) for 310 million euros (around Rs2,628 crore) which has development centres in Latvia and Belarus. Similarly, HCL Technologies acquired Hungary-based data engineering services provider Starschema Ltd for $42.5 million. Similarly, L&T Technology Services (LTTS) is also betting big on this region with expansion of its Krakow, Poland centre.

The ongoing conflict is also likely to push inflation of various commodities including aluminium, palladium, nickel, and fertilisers. Therefore, client-specific issues involving these players may crop up for Indian IT players if the conflict sustains.