Banking problems in the United States and Europe are expected to impede the expansion of Indian IT businesses

TCS, Infosys, Wipro, HCL Technologies, Mphasis, and LTIMindtree are among the Indian IT firms that have exposure to several of the ailing banks. Banking problems in the United States and Europe are expected to impede the expansion of Indian IT businesses.

The Indian IT services industry may bore the weight of the financial sector crisis in the United States and Europe, affecting their FY24 growth pace. Banking, financial services, and insurance (BFSI) are the industry’s main customers. According to Nasscom, BFSI accounted for 41% of industry revenue in FY23. Banking problems in the United States and Europe might lead to financial problems.

Tata Consultancy Services (TCS), Infosys, Wipro, HCL Technologies, Mphasis, and LTIMindtree are among the Indian IT firms with exposure to some of the ailing banks. Because of Banking problems in the United States and Europe, these IT sectors will face problems.

“We expected 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. Current woes in the banking sector can impact sequential growth by 1-2 percent in 1QFY24,” said a note from Kotak Institutional Equities. The note further stated that its current growth forecast for leaders — FY2024E — stood at 8 percent, which may be cut short by 1-2 percentage points due to the current crisis.

For instance, TCS has exposure to Silicon Valley Bank (SVB), Credit Suisse, and UBS. “We estimate SVB exposure is 10-20 bps for TCS, Infosys, and LTIM which may lead to a provision in 4Q23. While this has driven a correction and taken multiples down by 0.5-1, estimates don’t factor in the increased EPS (earnings per share) risk from any further slowdown in spending,” said a JP Morgan report.

Analysts anticipate that TCS and Infosys would make provisions for the effect in Q4FY23. According to Phil Fersht, CEO and principal analyst of HFS Research, in the United States, the SVB rescue may have had little impact and may have resulted in a tightening of IT spending as costs were rationalized. “SVB UK is now owned by HSBC, and there may be some vendor consolidation to HSBC preferred suppliers, but no major changes are expected this year,” he continued.

Experts, on the other hand, believe that two possibilities are developing for the industry. One is medium-term, in which these participants must account for the impact of these struggling institutions.

The industry will have difficulties in the medium to short term as a result of the impact on transaction flows.

“Q4 may not have an influence unless in the event of SVB. Yet, this may have an influence on transaction flow in the coming quarters.

Prices might also face pressure, according to Pareekh Jain, CEO of EIIR.

“We see some slowing in decision-making in primarily mid-size banks, as well as some delays due to consolidation,” Fersht added. We do not anticipate more than 2% growth in the industry this year. We see certain longer-term choices being postponed in the near term, which has a negative impact on spending on Indian IT services.”

Second, a long-term consequence may be a situation that arose during the Lehman crisis in 2008, in which banks sold their captives, concentrated more on expenses, and executed business ventures that were advantageous to the industry.

Fersht noted that as the industry restored stability and trust, he expected Indian services to benefit because most banks needed to engage in core modernization to remain competitive.

“We anticipate a greater emphasis on shifting to an outsourcing model and away from global in-house centers,” he added.

“We remain UW (underweight) on the sector as we expect revenue/earnings growth in FY24/25 to disappoint expectations at peak multiples,” JP Morgan stated. We anticipate a severe reset to the sector as a result of 1Q and FY24 guidance and comments.