Slow US economy, challenges in BFSI sector may drag IT firms in FY21

Slower growth in US economy, challenges in financial services sector may result in lower client spend

A deceleration in gross domestic product (GDP) growth of the US, coupled with slowdown in the banking financial services and insurance (BFSI) sector across Europe, is likely to drag growth of the IT services industry in the next financial year. 

While it may not be a major slowdown, experts believe that these factors could adversely impact client spend as well as deal flow.

In a recent report, analysts Nitin Padnabhan and Hiral Shah from Investec Securities noted that unlike FY19, when the US’ GDP was growing despite sectoral headwinds, FY20 growth levers are not the same and could directly impact Indian IT service providers.

“Key spenders from a vertical perspective – BFSI, manufacturing and retail – could see revenue headwinds and consequently, pressure on IT spend growth. We believe the symptoms of these revenue pressures could be visible on the books of businesses, leading to delays in new spend and lower deal activity. These are reducing visibility for FY21E,” wrote Padnabhan and Shah.

Other factors, noted by the report, include the looming US Presidential elections (historically, it leads to a lower industry growth), weak macro indicators, weak vertical-specific data on revenue growth as well as profitability. The US is going for presidential election in 2020.

“While Infosys and HCL could report better growth for the year, the potential impact on revenue growth in the latter half of the year as well as FY21 need to be watched,” the report added. 

Even Tech Mahindra, according to global telecom outlook, is expected to peak deal wins across telecommunications following 5G interest although non-telco performance has been shaky.

Recently, research and advisory firm Gartner had revised the 2019 IT spend growth downward to $3.74 trillion as compared to its earlier projection of $3.79 trillion. This is a fall of 0.6 per cent over the previous year. 

“Despite uncertainty fuelled by recession rumours, Brexit as well as trade war and tariffs, we expect IT spend to remain flat in 2019,” said John-David Lovelock, research vice-president at Gartner. 

Inspite of the ongoing tariff war, North America’s IT spend was forecast to grow 3.7 per cent and China 2.8 per cent in 2019. From a macro perspective, US GDP growth started decelerating in the beginning of FY20 compared to an accelerating trend in the beginning of FY19. 

Similarly, manufacturing growth rate in Europe, at the beginning of FY20, witnessed contraction in activity compared to the expansion at the beginning of FY19. Similarly, the pace of expansion in manufacturing activity in the US has also reduced sharply. Manufacturers say the higher costs as well as macro uncertainties on the trade war are affecting their performance.

With the recent US Fed rate cut (and estimates showing a further reduction in Federal fund rates), analysts believe this could impact bank profitability negatively, and, consequently, technology spend as well.

Nasscom and IT firms have been positive about the new technology spend by many of their US and European banking clients. 

At present, most of the brokerages have factored in an element of slower growth, even for top companies such as TCS, for FY21 on account of the softening US GDP.

“It is important to note that Indian IT large-caps may not have much to worry about in this scenario, as they will still continue to win deals from global players given that they have the capacity to do so. The concern would be in case there is an actual financial crunch across global clients, as that could pull back discretionary digital spend, which everyone is banking on,” said Pareekh Jain, founder of Pareekh Consulting.