Indian IT firms are budgeting for a year of slowdown: Kotak


BENGA LURU: Brokerage Kotak Institutional Equities said its checks indicated that clients of Indian IT companies were budgeting for a year of slowdown and expects FY20 growth to be in line or lower than FY19 growth even when digital deal sizes increase.

Indian IT companies have said they expect strong growth in FY20, but the potential of a US recession and a disorderly Brexit could lead to customers pulling back spending. The January-March quarter is typically when clients confirm spending plans for the year.

“FY2020 growth will be a function of two factors — (1) external headwinds emanating from slowdown in the US, uncertainty around Brexit and trade wars. Our checks indicate that clients are budgeting for a year of slowdown. Cost takeouts have become a key priority again and (2) tailwind from increasing digital deal sizes and accelerated deal momentum courtesy clarity on simplification of the core,” Kawaljeet Saluja, analyst with Kotak, said in a note.

“Admittedly, a strong exit to FY2019, bulging order book and positive commentary on demand should translate into a far better FY2020. However, the downside of a slowing market and the margin implications of the same cannot be ignored either. All said, we expect FY2020E growth to be broadly in line or marginally lower than FY2019,” Saluja added.

IT companies are also pointing out that they have weathered downturns before and any pullback in spending will not be very severe. Tech Mahindra CEO CP Gurnani said with major economies taking a hit as per IMF forecast, the slowdown will have a ripple effect.