Indian IT firms likely to face short-term headwinds, with BFSI and telecom sectors set to see a decline

IT services and consulting firm Accenture, which is seen as a leader in terms of results, recently announced its quarterly numbers and – if this is any indication – Indian IT services companies could face headwinds in the near future, especially in the BFSI and telecom sectors, analysts said.

According to Ray Wang, principal analyst and founder of Constellation Research, Indian IT services companies are facing three forces: exponential efficiency, where customers are looking for maximum savings; AI arbitrage, where investments in AI and automation need to deliver consistent and increasing levels of efficiency; and stagnant macroeconomic challenges.

He noted that demand is flat and most service companies will be lucky if they can squeeze out moderate single digital gains. Buyers are caught between cost savings, digital transformation projects, cybersecurity and the AI ​​investment level debate, which is lengthening decision cycles.

Companies are now prioritizing projects aimed at reducing costs and improving operational efficiency.

• Also read: Accenture’s weak quarterly results are accompanied by near-term challenges for the Indian IT sector

Accenture’s $2 billion in AI revenue was a bright spot for its earnings, Wang said. The global IT services company has made significant investments in AI, and it’s paying off. Accenture has moved faster from proof-of-concept (POC) to paid projects.

“We can expect slower adoption overall for Indian IT companies, although Infosys seems to be gaining ground in this space,” he said.

On the sector front, IT analyst Pareekh Jain, CEO, Pareekh Consulting and EIIRTrend, noted that while Accenture’s profits in the banking, financial services and insurance (BFSI) and telecom sectors have declined sharply, the same is likely to continue in the Indian IT industry.

However, another IT analyst, Omkar Tanksale of Axis Securities Limited, noted that Indian companies may regain strength across sectors compared to the previous quarter and that the year-end phase is likely to be strong. Otherwise, manufacturing, automotive, retail, pharma and healthcare sectors are seeing strong growth across geographies.

According to Wang, the green light for Indian IT companies is increasing public sector work, developing sovereign AI, and cybersecurity resilience after breaches. On the other hand, Tanksale has seen some positive developments in terms of transactions and margins, managing operating costs, optimizing costs, and curbing demand.

Jain noted that Accenture faces challenges similar to those faced by the Indian IT industry last quarter. However, he added that if there is an increase in digital investments led by consulting and GenAI in the next quarter, discretionary spending will return to normal.

While IT firms may be getting big deals or orders, it is not translating into revenue, Jain said. Despite big transformational deals, discretionary spending is not returning to normal.

“In India, Accenture has narrowed the guidance and I don’t see any recent scale-up. The trigger point is that deals will remain resilient. In Indian IT companies, on the demand side, I don’t see any strong scale-up in Q1FY25.”

“Demand growth may remain moderate for a few quarters; H2FY25 may see strong growth momentum. However, deals are likely to remain strong even in Q1FY25. Once the uncertainty is removed, we could see a strong revival in the IT space,” Tanksale said, adding that Indian companies would maintain their guidance and not lower it.

Although Accenture hired more than 7,880 people in the third quarter, layoffs of highly paid senior employees are allegedly continuing. Regardless of concerns about replacing GenAI jobs, there is no decline in short-term hires, Jain said.

However, IT service providers in India reported an overall decline in employee numbers in fiscal 2024. “The bigger concern was that if GenAI expands, employment will decline. Even if this happens, the pace is not very high. Both GenAI hiring and adoption may happen simultaneously, and that is a good sign,” he said.

The Tanksale analyst said Indian IT firms’ margins are likely to improve as they hire slowly. “OPC management has bottomed out and may be under control. They have reduced their on-site expenses.”

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