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Analysis | Indian Tech's Start to the Year Has Shades of 2012 – The Washington Post


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Outsourcing is India’s most outwardly focused industry. So, it’s only natural that fears of a global recession should make analysts wary of large software firms like Tata Consultancy Services Ltd. and Infosys Ltd.

Their concerns are not so much about the traditionally slow December quarter or even the current financial year that will end in March. A more problematic time frame may be the 12 months starting in April. Given that the epicenter of pessimism is Europe, analysts are drawing comparisons with the region’s 2012 sovereign-debt crisis. A repeat of that experience might make recovery a shallow, long-drawn affair. 

A slowdown looks inevitable, though when it comes to gauging its extent, Tata Consultancy’s financial results Monday offered few new clues. Expansion of a decade-long partnership with British retailing client Marks & Spencer Group Plc and a deal with American biopharma firm Gilead Sciences Inc. appear to have made up for nervousness in continental Europe. India’s most valuable software exporter clocked $7.08 billion in revenue, an increase of 8.4% from the December 2021 quarter. Net income of $1.3 billion was virtually unchanged from a year earlier. 

“We’ve gone into December with everybody being cautious,” Chief Executive Officer Rajesh Gopinathan said in a post-earnings press conference. “But our view is that this caution has a different color across markets.”

Still, the Mumbai-based company is not taking any chances. It pruned its employee base by a little more than 2,000, the first shrinkage in headcount since June 2020. From about 23% six months ago, TCS has managed to lift its operating margin to 24.5%. But profitability is only one part of the story; investors also need to get a more definitive read on the overall order book. For both TCS and its Bengaluru-based rival Infosys, analysts are projecting dollar revenue growth of around 10% in the coming financial year. 

That’s somewhat optimistic. It’s reasonable to expect such a swift turnaround if the coming slowdown is anything like the 2008 financial crisis or the pandemic that opened the floodgates to new orders. However, if a more apt comparison is the European malaise of 2012, then clients may take a lot longer to become confident again.

Investors will, therefore, pay close attention when Infosys reports its earnings Thursday. The No. 2 Indian player had so badly underestimated the 2012 funk, and its impact on European banking clients, that it scrapped its quarterly revenue guidance in July of that year — after repeatedly failing to deliver on its promise.

“During the 2012 Eurozone crisis also, consensus estimates consistently overestimated initial guidance of Infosys, which overestimated the eventual growth,” Mumbai-based brokerage JM Financial Institutional Securities Ltd. wrote in a note to clients last month. “A similar trend could mean gradual downward earnings revision for a protracted period.”

An additional complication this time around is the pandemic-era staffing. Starting in June 2020, TCS grew by 172,000 people in nine quarters as clients rushed to digitize supply chains. That demand is now back to a more normal pace. At the same time, though, corporate customers haven’t started conceiving large cost-cutting IT projects either — everyone is in wait-and-see mode. “We’re seeing a huge dip in hiring unlike previous years when we had to fight for talent,” Sunil Chemmankotil, CEO of temp staffing firm Teamlease Digital, told the Economic Times recently.

Hitting the brakes hard on recruitment helps in two ways. One, it shores up current margins. Second, it brings down employee attrition — which was still uncomfortably high at 21.3% for TCS last quarter — by lowering workers’ pay expectations. IT outsourcing firms originate 70% of Indian code-writing jobs. The other major employer is the local startup industry, which is laying off people in large numbers because of a funding crunch. The overall message to software engineers is clear: It may be unwise to quit one’s job this year. 

But even as profitability steadies for Indian software exporters, aided by a firmer lid on staff costs and a 10% slide in the rupee against the dollar over the past year, the order book may wobble if European clients shelve or delay large IT projects. A repeat of 2012 is the bigger worry now.

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services in Asia. Previously, he worked for Reuters, the Straits Times and Bloomberg News.

More stories like this are available on bloomberg.com/opinion



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