Indian IT biggies well placed despite a squeeze in global IT spend
Covid pandemic is a black swan event for the global economy. Barring few exceptions, most major economies including the US, EU, UK, and India are likely to see a contraction in GDP growth. According to the World Bank, the global economy is likely to shrink by 5.2 per cent in 2020. As the severe disruption in most sectors of the economy continues, IT spend by enterprises is also expected to be adversely affected.
Global consultancy firm Gartner predicts that IT spending worldwide is likely to be at $3.6 trillion in 2020, a fall 5.4 per cent against last year. Despite businesses following up digitization route to reach out to customers during this pandemic, all spending segments are projected to contract this year. While the IT services segment is expected to see a contraction of 4.6 per cent, enterprise software is likely to fall by 3.6 per cent. Similarly, data centre systems are projected to fall by 3.1 per cent, while communication services may contract by 2.9 per cent. When global IT spending, especially the IT services segment, is predicted to witness negative growth, Indian IT firms will definitely get affected.
Despite such negative projections, Indian IT players are likely to fair well this fiscal year as compared to their global counterparts. This can be gauged from the management commentary of Indian IT services firms post announcement of the second-quarter results. The country's second-largest IT services firm Infosys has revised its revenue growth guidance upward to 2 to 3 per cent in constant currency terms for FY21 from 0 to 2 per cent earlier. Top management of Tata Consultancy Services (TCS) said that a strong order book, a very robust deal pipeline, and continued market share gains give the IT firm confidence for the future. No wonder, TCS board approved buyback worth Rs 16,000 crore, indicating this optimism.
Another IT major HCL Technologies is projected to grow its revenue at 1.5-2.5 percent in FY21. The growth outlook of IT biggies stems from the fact that Indian IT firms are gaining market share as compared to their global counterparts on the back of vendor consolidation. Also, the acceleration seen in cloud migration and higher digitisation is supportive of this trend. As 'work from anywhere' gains popularity in the IT industry, offshoring revenue is witnessing an uptick, which is good news for the sector.
Though tier-I IT firms are gaining market share, the growth outlook for mid-tier IT services firms remains mixed. This is because when vendor consolidation happens, small and mid-tier companies lose outsourcing contracts to big players. Hearteningly, all prominent mid-tier firms have reported a good set of Q2 numbers, reflecting that their niche offerings have many takers in the global marketplace.