The IT services sector in India may have to bear the brunt of the banking sector crisis in the US and Europe, which may affect their FY24 growth momentum. The industry counts banking, financial services, and insurance (BFSI) as its largest customer base. According to Nasscom, BFSI constituted 41 per cent of the industry’s revenue in FY23.

Indian IT players like Tata Consultancy Services (TCS), Infosys, Wipro, HCL Technologies, Mphasis, and LTIMindtree have exposure to some of the troubled banks.

“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 normalisation in 2QFY24. Current woes in the banking sector can impact sequential growth by 1-2 per cent in 1QFY24,” said a note from Kotak Institutional Equities. The note further stated that its current growth forecast for leaders — FY2024E — stood at 8 per cent, 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 that 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 are expecting TCS and Infosys to create provisions for the impact in Q4FY23. In the US, said Phil Fersht, chief executive officer (CEO) and chief analyst, HFS Research, since the bailout of SVB had taken place it might not impact and might see tightening in spending in IT as costs were rationalised. “SVB UK is now under HSBC and there could be some vendor consolidation to HSBC preferred suppliers, but do not expect any major changes this year,” he added.

Analysts, however, are saying there could be two scenarios building up for the sector. One would be medium-term, where these players will have to provision for the impact of these troubled banks. The medium to short term will be a troubled period for the sector because this will impact deal flows too.

“Q4 may not have an impact except in the case of SVB. But this may impact deal flows for the next few quarters.

Pricing could also come under pressure,” said Pareekh Jain, CEO, EIIR.

Fersht said: “We see some slowdown in decision making in mainly mid-size banks, and some delays due to consolidation. We do not expect growth of more than 2 per cent in the sector this year. In the short term, we see some longer-term decisions being delayed, which has a negative impact on spending on Indian IT services.”

Second, a long-term impact could be a scenario that emerged after the Lehman crisis in 2008, when banks sold their captives, focused more on costs, and ran business projects, which, in turn, turned out beneficial for the sector.

Fersht added as the sector regained stability and confidence, he would expect Indian services to benefit because most of the banks had core modernisation investment to make to remain competitive.

“We expect a stronger onus to move to an outsourcing model and away from global in-house centres,” he added.

J P Morgan said: “We remain UW (underweight) on the sector as we expect revenue/earnings growth in FY24/25 will disappoint expectations at peak multiples. We expect 1Q and FY24 guides and commentary driving a sharp reset to sector expectations as a weak 1Q becomes more visible.”

The turmoil has rekindled the fear of a global recession. The IT sector is suffering the heat as seen in the correction in the stock prices of top players. The shares of TCS have slipped over 8 per cent in the last nine trading sessions. On Tuesday, the scrip was down 1.12 per cent, closing at Rs 3,105.9 on the BSE, triggered by the sudden CEO change along with banking pressure.

In the consecutive fall in nine sessions, the share prices of other IT heavyweights like Infosys, HCL Tech, and Wipro have declined by 6.8 per cent, 3.3 per cent, and 6.6 per cent, respectively on the BSE.

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