Weakening US outsourcing to hit IT firms in Q1

Bengaluru Outsourcing sentiment in the US market is weaker than European nations, causing concern for the Indian IT services providers. Experts are of the opinion that April-June quarter (Q1 of FY24) could see performance becoming worse than projected by these IT firms on the back of slowdown in existing business.

“We have seen customer sentiment takes a significant step back in North America. Europe seems to be holding up, but may follow North America,” Peter Bendor- Samuel, CEO of global consultancy firm, Everest Group told Bizz Buzz.

This is significant as Indian IT firms draw more than 50 per cent of their revenues from the US, while one third of the top line is contributed from the Europe including the UK. Worsening sentiment in the US, especially in the BFSI (banking, financial services and insurance) vertical doesn’t augur well for the domestic IT firms.

Weakening sentiment in the US was already visible in the fourth quarter of last fiscal year when growth in North America for major players fell below Europe.

Market leader Tata Consultancy Services clocked 9.6 per cent growth in North America in constant currency term as compared to 17 per cent growth posted in the UK and 8.4 per cent in continental Europe.

Infosys’ North America revenue grew six per cent in constant currency term during the fourth quarter of FY23 as compared to 20.3 per cent posted in the Europe.

BFSI vertical was the weakest link for most IT firms owing to the banking crisis seen in the US. Infosys’ financial services vertical grew 0.4 per cent in Q4 of FY23, while the growth for TCS was at 9.1 per cent.

“Except Infosys, the June quarter could be weaker than the March quarter for many companies. We attribute the weakness to project pauses and cancellations in North America and select verticals such as banking and communications. The pause and cancellations materialised in February and accelerated in March. The full impact of this will be visible in the June 2023 quarter,” Kotak Institutional Equities wrote in a note.

According to sources in the know most large and mid-tier firms are likely to miss their Q1 projections as the full extent of slowdown will be visible during this quarter.