Last quarter, the Indian information technology industry received a wake-up call. Demand has slowed for the first time in two years, but corporations hoped that cost-cutting programmes would compensate for deal ramp-downs and cuts in discretionary spending.

While experts predict a lacklustre first quarter of the fiscal year for India, they also predict a comeback by the end of 2023 or early 2024.

Longer deal close delays, insourcing, big contract cancellations, vendor consolidation, and project ramp-downs now coexist alongside large deal announcements and increased outsourcing expectations. Midway through the year, undecided technology investment sentiments have not changed from where they were at the start of the year. What will the remainder of the year bring?

Transamerica, a US-based insurer, said in June that it is terminating its $2 billion, 10-year contract with Tata Consultancy Services after five-and-a-half years. Transamerica said that it will outsource its requirements. TCS, on the other hand, secured a $1.1 billion agreement from Nest in the United Kingdom. That contract was initially secured by rival Atos, but it was unexpectedly terminated two years later. Over the last six months, TCS has recorded some of its largest agreements since the epidemic.

Infosys recently secured two huge transactions for $1.5 billion from oil major BP and $454 million from Danish lender Danske Bank, highlighting prospects in the cost-efficiency arena.

During the 28th annual general meeting of Tata Sons on Thursday, Tata Sons chairman N Chandrasekaran stated that the global economic forecast for 2023 seemed to contain downside risk. He expects discretionary expenditure to stay under pressure.

He anticipates considerable growth in the medium to long term. However, in the next quarters, there will be volatility in different markets on consumer spending, particularly on discretionary projects, and it will span sectors, according to Chandrasekaran.

According to Peter Bendor-Samuel, chief executive of the Everest Group, the industry in India is still in a recession mindset, with discretionary spending being cut, cost-cutting projects on the rise, a delay in the modernisation movement, and new investments focused on clear and quick paybacks.

Bendor-Samuel anticipates that the industry’s growth rate would fall from 13% last year to 3-5% this year. Customer sentiment deteriorating in Q2-Q3 and perhaps improving in Q4 calendar year. However, the speed of recovery remains unknown, he noted.

The present demand climate faces a variety of problems, some of which were highlighted by Accenture during its March-May results report last week. For its fiscal year 2023, which ends in August, the firm reduced its revenue growth target from 8-10% to 8-9%, indicating slow growth for the June-August quarter, which coincides with Indian IT services’ fiscal second quarter (July-September).

Given no expectation of recovery from Accenture in August 2023 and in keeping with the April 2023 quarter, ICICI Securities believes FY24 profit predictions for Indian IT businesses may be revised downward, according to a note issued following the Accenture results. The IT consulting firm has identified areas of weakness in Europe, the communication media and technology (CMT) sector, and its strategy and consulting practise. Due to their substantial exposure to the CMT industry and consultancy practises, ICICI Securities has issued a warning to Indian businesses like as Wipro and Tech Mahindra.

Indian IT companies that offer revenue projections have already significantly reduced their growth forecasts for fiscal 2024. Wipro of India expected sales to fall 1-3% in the financial first quarter ended June 30, citing a weak market picture, while Infosys of India guided for 4-7% growth in the current fiscal year, the lowest in six years. HCLTech expects a 6-8% gain in constant currency revenue in fiscal 2024, half the rate it reported in fiscal 2023.

The banking, financial services, and insurance (BFSI) portfolio, which accounts for almost 40% of the IT sector’s income in India, is projected to stay under pressure at least until the September quarter, and maybe into the next quarter as well.

Accenture India reported a 1% decrease in staff, which management stated would continue. Indian IT firms are expected to report a decrease in headcount in April-June, following a trend that began in the previous quarter.

According to Spencer Ng, an analyst at S&P Global Ratings, top Indian IT businesses have more exposure to the US than Accenture and less exposure to the UK and the rest of Europe.

In the company’s annual general meeting last week, India’s Infosys CEO Salil Parekh stated that the overall demand environment has altered as the global economy slows.

He believes that clients’ emphasis is shifting away from digital and cloud transformation and towards cost optimisation and automation. And they are lucky, he says, because there are many prospects even in the consolidation area.

He described the company’s recent deals with BP and Danske as cost-cutting possibilities. According to the organisation, such agreements help clients decrease expenses through outsourcing, automation, and digitization.

Nonetheless, greater indicators of demand uncertainty have confounded experts.

According to JP Morgan analyst Ankur Rudra, paused projects may have limited visibility of restarting, and signs of demand recovery over the next 6-9 months may be limited, potentially lowering 2H (second half) growth expectations and FY24 industry growth in India to sub-5% year on year levels from their previous 4-7% post-Q4 results.

While Indian industry experts agree that significant contract cancellations were anomalies, several executives have previously warned of a rising tendency of transaction cancellations, particularly for discretionary spending. In addition, consolidation in India is showing no signs of abating, having begun in the October-December quarter of last year and intensifying by early 2023.

Clients are cancelling deals because they want to break down larger contracts into smaller ones, allowing them to adjust strategies, recalibrate requirements, re-evaluate investments, and choose the best vendor for each smaller programme, according to Omdia senior principal analyst Hansa Iyengar.

Omdia monitors publicly publicised transactions worth more than $1 million, and its database reveals $45 billion in contracts set to expire in the next six months.

However, she stated that they have seen an increase in in-sourcing in the previous 12 months and expect the trend to continue until 2024.

According to Ray Wang, creator of Constellation Research, around 13% of existing transactions in the Indian industry may change suppliers by 2023 unless insourced. Some people may cancel contracts, others will consolidate contracts, and yet others will check out boutique suppliers for industry-specific or AI capabilities, according to Wang, who added that they are in a highly dynamic market.

Most industry experts and analysts feel that the sector is in a state of flux, undergoing enormous changes in the nature of technology and business models that will define the decade and continue to fuel apparently conflicting demand in the near to medium term. Bendor-Samuel, for example, stated that the interaction between business processes and the technological stack is growing increasingly close. This will result in insourcing and the establishment of captive or global capability hubs.

However, they are not anticipating an end to the requirement for third-party services; in fact, they predict an increase in demand. However, in order for this to happen, third-party providers must move from owning and running technology to collaborating and enabling, according to Bendor-Samuel.

Another area where he thinks discretionary expenditure to increase is AI, where a lot of new work will emerge. They envision bigger and mega transactions returning to the market, and they expect the winners to outperform the overall market. Larger Indian enterprises like TCS, Infosys, and Cognizant appear to be well positioned to win the lion’s share of these major transactions, he noted.

This is a trend that both India’s TCS and Infosys emphasised during their annual general meetings: AI investments would take main stage.

According to Ng of S&P, the high level of integration that many Indian IT firms have with their clients makes it costly for the clients to transfer suppliers or shift to insourcing. So, even as customers seek vendor consolidation and cost savings, Indian IT has a superior view of income.

With strong partnerships and comprehensive service offerings, Indian IT businesses are strongly embedded in their clients’ ecosystems, making high switching costs an important factor for clients. As a result, while new bookings may lag or pricing pressure on current contracts may grow, he sees less danger from increasing insourcing for service providers.

There are however some rays of optimism owing to India’s wider macroeconomic worries.

There is a market dread of unknown unknowns, but this will not endure long, according to DD Mishra, senior director analyst at Gartner.

Globally, there is a downturn, although certain economies, such as China, are rebounding. According to Mishra, inflation is also decreasing but remains high, and currencies are stabilising versus the US dollar. This may result in some minor variations in the growth prediction for IT services spending in 2023, but the outlook for India from 2024 onward remains optimistic, he noted.

Conclusion.

Longer deal close delays, insourcing, big contract cancellations, vendor consolidation, and project ramp-downs now coexist alongside large deal announcements and increased outsourcing expectations. Midway through the year, undecided technology investment sentiments have not changed from where they were at the start of the year. What is India’s outlook for the remainder of the year?