As a result, software exporters may suffer a “softening of momentum” despite Russia as a geography constituting less than 1-2% of overall revenue for the $227-billion Indian IT industry, according to analysts who track the sector.
“We believe this event (Russia-Ukraine conflict) will bring headwinds for Indian IT (companies) in the form of delayed decision-making over the next few quarters, which may gradually soften the total contract value momentum,” said a note by brokerage Dolat Capital.
Recently, consultancy HFS Research revised its growth forecast for global IT services spending in calendar year 2022 to 7%, down from the 10% it had predicted at the end of last year. “The combination of geopolitics, inflation and staff attrition is slowing down some of the momentum in total contract value,” Phil Fersht, founder and chief executive officer of HFS Research, told ET.
This estimate of headwinds comes at a time when Indian IT has posted accelerated growth on the back of a sharp increase in digital and cloud-based deals stoked by demand for digitisation amid the pandemic. IT research firm ISG said top Indian IT companies won 31% of $33 billion managed services deals awarded in 2021 with this share likely to increase.
While conceding that “there is no first-order impact on Indian IT (companies)”, the note by Dolat Capital cautioned that “the double-impact for global corporations on revenues and costs cannot be ignored and is definitely not baked into the hyper-optimistic (growth) estimates for IT services”.
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The Indian IT industry has grown — twice as fast compared to pre-pandemic levels — to touch $227 billion in revenue and had a total workforce of 5 million by financial year 2022.
Sanctions bite
Since the start of the war, western governments have imposed multiple sanctions on Russia, effectively making it difficult for corporations to do business in the country. Cutting off oil supply from Russia — the world’s third-largest exporter — has also fuelled crude and commodity inflation.
In turn, these measures have placed digital transformation and technology spends on the “soft pause” in boardrooms, according to Dolat’s report. The study tracks over 300 MNCs such as Volvo, BP, Daimler Truck, Mastercard, which have either fully exited the country or signalled that they will not take up new businesses in Russia. This could lead to 1-5% revenue impact for these companies, Dolat estimates.
IT services companies with greater exposure to European clients will face the most heat, analysts said. “Mostly, energy companies (in Europe) will be impacted,” said a Mumbai-based IT sector analyst on the condition of anonymity.
Bengaluru-based Wipro had 11.7% of overall revenue coming from energy, natural resources and utilities as of December 2021 and Europe is its second-largest market in terms of revenue by geography. In comparison, rivals Infosys and HCL Tech have a slightly lower contribution to their overall revenue from the energy vertical, while TCS does not provide a separate disclosure for share of revenue from the energy business.
“We do not see any meaningful impact on our business. We are monitoring the situation closely,” Wipro said in response to ET’s queries.
TCS, Infosys and HCL did not respond to requests for comment.
However, HFS Research’s Fersht said globally, plans to invest more in cloud and security are being discussed with a greater urgency at board levels as the military conflict has emphasised the need for effective cloud-based operations.
Price increases
Further, clients may also be hesitant to award price increases to service providers at least in the current calendar year to offset the wage-inflation faced by the Indian IT sector due to the ongoing talent crunch.
“We are seeing price hikes from most IT services providers between 10 and 20%. This is already happening and is having some impact with clients. Some providers will keep their pricing stable, but this is not a sustainable strategy. All prices have to rise to cover the cost of staff and business operations,” Fersht added.
IT companies are facing steep rates of attrition since mid-2021 due to accelerated demand for talent. Companies have increased campus hiring to dodge talent issues.
TCS is estimated to have added more than 100,000 freshers for the financial year ended March 2022. Infosys, too, upgraded its hiring numbers to 55,000 freshers in 2021-22.
