Outsourcing deal concerns IT firms, weakness in BFSI could impact: Experts

Weak order booking by Accenture in the key outsourcing business during the March to May quarter is seen by experts as a warning signal for Indian information technology (IT) service companies. The segment is their major play. 

Accenture is considered a market leader, with over 60 per cent of revenue from digital services. It reported an outsourcing book to bill ratio of 0.96 in the quarter, as against 1.08 in the preceding one. The company follows a September-August financial year. This relatively weaker order booking, especially from the IT outsourcing segment, was majorly on account of demand softness in BFSI (banking, financial services, insurance) in Europe, apart from the manufacturing vertical. Accenture derives close to 70 per cent of its revenue from IT outsourcing; the ‘consulting’ business accounts for the rest.

“The slower pace of order booking (at Accenture) indicates the total pie is not growing in the outsourcing deal space. Overall, weakness in BFSI, manufacturing and telecom could have some impact on the deal momentum,” said Pareekh Jain, an outsourcing advisor. 

According to brokerage Prabhudas Lilladher, growth in technology spending atn BFSI clients in the US and Europe may be muted in 2019-20. This would be due to trade war concerns, uncertainty in central bank policy and Brexit-related developments. 

“Accenture bookings and ISG contracting data also indicated weakness in deals,” the report stated.

Some are optimistic that top-tier domestic IT firms will stick to their earlier revenue forecasts for the year. “Pockets of weak BFSI may drive marginal but not meaningful deceleration for Indian IT players. However, it is margins that pose a risk to earnings growth this fiscal and the first quarter of FY20 may reflect some moderation in this regard,” Motilal Oswal said in a research note.  For this financial year, market leader Tata Consultancy Services (TCS) is confident of double-digit revenue growth. Infosys has said it expects one of 7.5-9.5 per cent and HCL Technologies of 14-16 per cent.  

“Even as the demand environment is reasonable for offshore pure-plays (IT services firms), we expect rough edges to performance of companies with volatile financial services and uncertain manufacturing, especially for those that have high exposure to the automobile segment,” Kotak Institutional Equities said in a note. 

“Though broader demand is still reasonable, a slowing market is also a reality.”