Europe to lead recovery for Indian IT firms in September quarter: Analysts

$825 bn stimulus package announced by the European Commission to help banking, financial services insurance sector.

Europe is set to drive growth for IT service providers in the September quarter on the back of recovery in demand from the region and accelerated investments in nearshore centres by the service providers. 

The geography had already shown green shoots in the first quarter of FY21. Europe was the only global market to show positive growth for Infosys in Q1 while bigger rival Tata Consultancy Services (TCS) recorded highest growth from the geography during the same period.

Continuity in market share gains in Europe and resumption in lateral hiring are key growth drivers for TCS while expansion of onshore and near-shore presence in the region will support growth for Infosys, a recent report by HDFC Securities said.

Analysts also say the $825 billion stimulus package announced by the European Commission will help the banking, financial services and insurance (BFSI) sector that will, in turn, help Indian IT companies. 

“We expect Europe's BFSI clients would continue investing technology and digital initiatives for cost efficiencies. This would lead to increased outsourcing and offshoring to low-cost locations,” said Sanjeev Hota, vice president, Sharekhan. “The stimulus measures have improved the liquidity situation at large banks which is expected to expedite their digital processes to function better.” 

The recovery package announced last month includes more investment in 5G and 6G networks, with the beneficiaries expected to be sectors like health, transport, and education. The package will also fund development and upgradation of tech such as artificial intelligence, cybersecurity and cloud infrastructure which is likely to benefit the Indian IT services providers. 

Europe, in fact, was the first region to be affected due to the Covid-19 pandemic after China and also the first markets to reopen. “From economic activity and demand perspective, Europe is much ahead of the curve,” says Rajesh Gopinathan, CEO & MD of TCS. “They were the most impacted in the beginning but they have got the pandemic under control and opening up. So we definitely think Europe will be better in next (July-September) quarter.”

In Q1FY21, the Tata Group company reported highest growth in Europe, growing 2.7 per cent year-on-year. This was followed by Latin America at 0.2 per cent in constant currency terms. All other geographies witnessed a decline. For Infosys, too, Europe was the only global market that grew in the June quarter clocking 4.4 per cent growth YoY.

Experts also say the location-independent working environment and Brexit fallouts sets the perfect stage for Indian IT firms to crack into this Europe puzzle where language and worker unions act as major barriers.

“Europe's IT outsourcing market potential would be around $200 billion (excluding UK) and Indian players have hardly 10 per cent share of that pie. The region is still a small percentage compared to the US and UK. There is definitely a headroom for growth,” said Pareekh Jain, an outsourcing advisor and founder of Pareekh Consulting.