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As US recession fears grow, what Indian IT employees, shareholders need to know? | Mint – Mint

Global brokerage and research firm JPMorgan’s recent CIOs survey, conducted by its US Tech team, indicated that IT budgets are expected to contract 1-2% in ‘real terms’ growing 5/6% in nominal terms over CY22/23 vs inflation of 6-8%. 

The likelihood of a recession has increased rapidly this year as inflationary pressures remained strong and central banks across the world are taking aggressive action to tame them.

The 142 CIOs in the survey assign 30%/31% chance of recession/contraction in US/Europe an 35/38% chance of growth slowdown over the next 12-18 months. 39% of the CIOs expect to delay/defer their IT purchases in 2HCY22.

What’s the impact on India IT Services companies? 

In a recession, the report suggests that CIOs using Indian IT companies Tata Consultancy Services (TCS), Infosys, Wipro as a vendor would cut their IT spending with them respectively. 

The proportion of CIOs looking to contract is higher than at global players IBM (24%), Accenture (34%) and Deloitte (40%). This is contrary to investor perception that offshore vendors could gain share as enterprises focus on cost savings during a macro slowdown.

“In a recessionary scenario, 26/43/47/50% of CIOs using TCS, Infosys, Wipro, and Cognizant as vendors indicated intentions to cut their IT spending with the vendor although this corresponds to a small subset (14-19) for each of these firms’ respective client base,” the note stated.

Moreover, the feedback on Indian IT vendors may not be very representative as it is based on a sample size of 14-19 clients that is small vs their overall client base (>1,000) and enterprise clients with budgets >$1bn matter more for Indian IT. However, the direction of conversation reiterates that we are moving from expansionary to slower growth.

JPMorgan had downgraded Indian IT to underweight in May, highlighting risks to margin and growth expectations. A recession and deferrals in spending would drive further downside risks to its view.

“We see rising margin headwinds in 1H and revenue headwinds from 2H from a potential macro slowdown. We see peak revenue growth behind us and EBIT margins trending down from inflation, mean reversion. We feel there are more downside risks to current earnings assumptions. We stay underweight (UW) on the Indian IT sector,” JPMorgan’s note added.

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