Client-specific risks a trip factor for IT companies, says analyst

Client-specific issues have started to show up in the information technology (IT) services sector, and these may create growth bumps.

Analysts said the decision of Deutsche Bank to exit most of its investment banking business, apart from uncertainty over the business prospects of Huawei, were examples. With possibly significant adverse impact on many big companies.

Sources say Deutsche Bank’s annual IT outsourcing spending, around $6 billion a few years before, has come down in recent years due to insourcing. The German bank still outsources $1 billion of its IT service work to global vendors, including Indian ones. “No player is exempt from the secular industry trend towards digitisation. In a period of such unprecedented change, client-specific issues can cause blips in quarterly results,” said Chirajeet Sengupta, partner at global consultancy Everest Group. “Under such scenarios, enterprises are likely to either go through a rationalisation of their supplier portfolio or witness a temporary curtailment in demand.”

Among Indian companies, Everest, HCL Technologies, Tata Consultancy Services and Infosys Technologies have significant exposure to Deutsche Bank. HCL had a joint venture with the German bank to transform the latter's cheque processing operations late last year.

“Like Morgan Stanley or Bank of America, Deutsche Bank is one of the big spenders for Indian IT firms. With closure of capital market operations, the bank is shutting down 25 per cent of its business, which definitely will translate into some business loss for domestic IT firms,” said Pareekh Jain, an IT outsourcing advisor.

As part of a global restructuring, Deutsche Bank decided to slash 18,000 jobs. It plans to exit most of its investment banking activity, to enable focus on the corporate, private banking and asset management segments. 

Indian IT firms had also flagged softness in the capital markets and European banking business as they announced first quarter earnings.

As for Huawei, global provider of communications infrastructure and smart devices, it now has uncertain business prospects due to the US government's reservations regarding its operations. Cognizant and Tech Mahindra have meaningful exposure to Huawei. L&T Technology Services, Mindtree, Infosys, and Wipro have some level of engagement.

While slowdown in spending by marquee clients would mean business losses in the short term, analysts said the firms are better placed to overcome these. “Client-specific risks have always been around. But, most Indian vendors have been good at reducing excess exposure to a limited clientele,” said Hansa Iyengar, senior analyst at Ovum Research.