The long-term demand mega cycle is, however, strong, experts said.
IT analyst and advisory firm Everest Group said the IT services industry will grow by 6.7% year-on-year in organic constant currency terms in the 12 months ending March 2023, down from the 10.4% growth in the 12 months ending March 2022. The primary driver of this growth deceleration is the unique growth in the 12 months ending March 2022 which benefited from weak performance in the previous fiscal year.
The growth fundamentals of the industry are, however, stronger than ever, and “we continue seeing the undercurrents supporting long-term demand mega upcycle,” said Peter Bendor-Samuel, chief executive of the Everest Group.
As concerns around inflation rise, the IT index on the BSE has fallen by 17% in the past six months even as IT firms themselves have reported strong numbers.
The current deals are more likely to benefit full-stack providers like TCS, Infosys, among others, while niche providers may face hiccups.
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“We may see an increase in the legacy outsourcing of infrastructure as firms delay modernization projects to the cloud but shift their internal teams to focusing on the cloud and moving these infrastructure and support functions to an outsourced model. Hence, firms with large infrastructure practices such as HCL, Wipro and TCS could do well,” Bendor-Samuel added.
Between 2021 and 2024, global growth is projected to slow by 2.7 percentage points, according to the World Bank, more than twice the slowdown seen between 1976 and 1979, when the world last saw stagflation.
“Apart from segments dependent on oil prices, we see little impact of inflation on the managed services industry. Providers are investing in automation to balance out cost pressures and adjusting cost of living allowance (COLA) in outsourcing contracts,” said Mrinal Rai, principal analyst, ISG.
IT services providers have baked these concerns into their existing outlook and even in case of a recession, digital transformation spends are expected to continue, Rai added.
Everest’s initial forecast for April 2023 to March 2025 expects the base case growth of the IT services industry to be 6% yoy in organic constant currency growth terms.
This forecast factors in a moderate impact from potential recession, which would be partially offset by strong fundamental growth drivers, Bendor-Samuel added.
“In the event that there is a recession, there could be some slowdown of transformation work which will actually give system integrators some relief from the high demand environment, attrition and wage inflation,” said DD Mishra, senior research analyst, Gartner Research.
If the demand cycle flips to a higher scale than what was seen during the Covid-19 pandemic, companies will be stretched too thin to manage their resources, Mishra added.
“But that is unlikely to happen as the high demand cycle has passed.”
