Indian IT companies are heavily reliant on the US banking, financial, services, and insurance (BFSI) sectors as a key revenue segment. Analysts believe that any banking crisis in the US and Europe will hurt inflows and growth in these firms, particularly those with high exposure to US banking institutions, such as Tata Consultancy Services (TCS), Infosys, Wipro, LTIMindtree, and Cognizant. The BFSI contribution to the revenue of these Indian IT companies is above 25%, according to earnings reports. Analysts suggest that if the turmoil in the banking sector worsens and large banking institutions collapse, it could lead to a reduction in existing business, as well as trigger reduced tech spending in the future, along with delayed deal closures.
According to domestic brokerage house Kotak Institutional Equities, the recent developments around bankruptcy of Silvergate, SVB and Signature Bank in the US and UBS-CS merger in Europe will likely impact growth for Indian IT in 1HFY24, and bring down overall growth for FY2024. The brokerage believes TCS and Infosys are better positioned, whereas Wipro and Cognizant are vulnerable. It expects a growth slowdown in FY2024 to play out in the form of a weak March 2023 quarter, followed by a moderate uptick in 1QFY24 and normalization in 2QFY24.
Indian IT companies
Kotak believes that there can be a pause or slowdown in pace of digital/cloud programs due to cut in discretionary spending in the near term. The cut in discretionary spending will impact all Indian IT companies. The brokerage suggests that lower exposure to BFS will reduce the impact on HCL Tech and Tech Mahindra. It also adds that higher focus on cost take-outs will generate opportunities in the form of application rationalization, higher offshoring, captive carve-outs, enabling automation, and vendor consolidation. Kotak believes that TCS and Infosys are better positioned among Tier 1 IT, and LTIM and Mphasis can benefit among mid-tier. However, the latter will face near-term headwinds due to outsized exposure to BFS and significant exposure to the impacted mortgages sub-vertical.
The brokerage also states that CTSH and Wipro are vulnerable among Tier 1, as higher consulting exposure increases vulnerability for the latter. It warns that caution among BFS firms in developed markets, following recent developments around bankruptcy of Silvergate, Silicon Valley Bank and Signature Bank in the US and UBS-CS merger in Europe, will likely lead to further curtailing of discretionary tech spends in the near term. The note said that spending on cost take-outs will pick up but will yield benefits in 2HFY24 or later. Kotak also expects further polarization of growth between winners and losers in FY2024. It says that the current woes in the banking sector can impact sequential growth by 1-2% in 1QFY24. This assumes quick resolution to the global banking crisis and problems remaining localized to BFS. The brokerage's current growth forecast for Indian IT companies for FY2024E stands at 8%, which may get impacted by 1-2% due to the current crisis. A full-blown recession will have a bigger impact, it says.
Kotak also provides information on the BFS exposure of Indian IT companies. According to the brokerage, the BFS exposure, excluding insurance, for TCS stands at 29%, CTSH at 19%, Infosys at 26%, Wipro at 27%, HCLT at 14%, and TM 12%. Europe BFSI exposure for Infosys, Wipro, and CTSH stood at 4.9%, 11.7%, and 6.2%, respectively. The brokerage estimates TCS Europe exposure at 13%. It
The brokerage also states that CTSH and Wipro are vulnerable among Tier 1, as higher consulting exposure increases vulnerability for the latter. It warns that caution among BFS firms in developed markets, following recent developments around bankruptcy of Silvergate, Silicon Valley Bank and Signature Bank in the US and UBS-CS merger in Europe, will likely lead to further curtailing of discretionary tech spends in the near term. The note said that spending on cost take-outs will pick up but will yield benefits in 2HFY24 or later. Kotak also expects further polarization of growth between winners and losers in FY2024. It says that the current woes in the banking sector can impact sequential growth by 1-2% in 1QFY24. This assumes quick resolution to the global banking crisis and problems remaining localized to BFS. The brokerage's current growth forecast for Indian IT companies for FY2024E stands at 8%, which may get impacted by 1-2% due to the current crisis. A full-blown recession will have a bigger impact, it says.
Kotak also provides information on the BFS exposure of Indian IT companies. According to the brokerage, the BFS exposure, excluding insurance, for TCS stands at 29%, CTSH at 19%, Infosys at 26%, Wipro at 27%, HCLT at 14%, and TM 12%. Europe BFSI exposure for Infosys, Wipro, and CTSH stood at 4.9%, 11.7%, and 6.2%, respectively. The brokerage estimates TCS Europe exposure at 13%. It
