Telecom, technology downturn hits IT service providers

India’s USD 245-billion IT services sector is staring at its weakest financial years, and a downturn in spending among telecom and tech clients is not helping.

The second week of January this year confirmed a bit of unwelcome news for India’s mammoth Information Technology (IT) services industry. As weak macroeconomic sentiments persisted, the bellwether indicator of technology spending in India was heading for one of its weakest financial years in recent history. Even as Tata Consultancy Services (TCS) and Infosys look at a flat FY24, and Wipro heads for a considerable decline, HCL Technologies remains the only company that could post any meaningful growth for the year.

The December quarter reflected a considerable slowdown in tech and telecom verticals for all three out of the top four of India’s IT services.

Data collated by Voice&Data for this report shows that technology and telecommunications remain a sore point for IT service providers. These two verticals, while not being the top serving vertical for any of the top four IT services firms, are still significant—taken together for India’s top four IT services firms, they generate at least 15.1% of TCS’ quarterly revenue as of Q3FY24, and as much as 22.5% of HCL Tech’s quarterly revenue for the period. This, in turn, makes them key indicators of the health of the market, since tech and telecom are also big on discretionary deals.

The state of the market

Discretionary deals are super important for the IT services industry since they are the lifeline of the service providers doing well. In a healthy market, discretionary deals are available aplenty. They offer large margins of profitability for the service providers, which in turn helps the overall industry thrive.

The reason why these sectors are often seen as being heavier on discretionary deals and low on core cost optimisation deals is that services in these areas are largely to upgrade to newer infrastructure, or adopt a nascent area of technology. As a result of this, the December quarter reflected a considerable slowdown in tech and telecom verticals for all three out of the top four of India’s IT services.

Starting with TCS, revenue from technology services dropped 5% YoY in constant currency to account for 8.4% of the company’s overall revenue as of the December quarter. Communication and media, which includes telecom and networking as sub-sectors, also saw a 4.9% YoY drop in revenue. Among the companies, Infosys performed the worst; its communication services are down 8% YoY in constant currency to account for 11.4% of its quarterly revenue. Technology, meanwhile, dropped 5.1% YoY to 7.7%. For Wipro, tech and communications revenue dropped to 12.1% and 4% respectively. While tech revenue grew by 1% during the December quarter, communications revenue declined by a considerable 19.2%.

This slowdown also reflects the global slump in telecommunications innovation spending, as well as tech spending among clients around the world.

Impact on networking and telecom

An analysis of the type of deals available in the sector shed light on the issues with the overall IT services industry, and what they face at the moment. The entire sector is going through a slump right, driven by global macroeconomic headwinds. This is causing clients to spend less on various aspects, including innovation and advancements in technology. Apart from the regular maintenance and servicing deals, telecommunications and networking typically involve discretionary spending on new areas, such as the adoption of the industrial Internet of Things (IIoT), 5G and other enterprise connectivity options. Satcom, too, is one such area.

In the technology sector too, this holds for the nature of client deals that is causing the overall slowdown. The only outlier to all of this is HCL Tech, which saw an 8.3% YoY constant currency revenue growth in its telecommunications vertical. However, it is important to note that HCL Tech’s growth in telecom revenue was boosted by a solo deal—the company’s largest-ever deal, won back in August last year from US telecom major, Verizon. The USD 2.1 billion deal fuelled the rise of this vertical for the company. Apart from this, the slump is persistent, as seen in a 9.2% YoY constant currency revenue decline from its technology vertical. This now contributes only 12.8% of its overall revenue.

This slowdown also reflects the global slump in telecommunications innovation spending, as well as tech spending among clients around the world. Until macroeconomic conditions improve, experts, including the chief executives of the top four IT services firms, continue to expect weak adoption of cutting-edge tech standards. This is because the latter requires additional budget allocations from companies, which continues to remain difficult for clients to pull off in such a cautious environment.

Early signs of recovery?

Experts indicate that there are signs that show that the next few quarters could be crucial to observe. TCS, in its investor presentation, said that it is seeing traction for the adoption of IIoT, delivering OTT platform experiences to customers, and working on enterprise 5G networks as well. It also singled out the demand for data on cloud platforms, driven by a rising drive for generative AI applications around the world.

TCS, to be sure, acts as an indicator for the entire industry; in the past four quarters, it earned USD 28.9 billion in revenue, and with nearly 600,000 people, employs over 43% of the entire workforce strength of the top four firms in the IT services industry. Due to this influence, trends observed by TCS across the industry typically precede the market performances of its peers. This, in turn, drives home an early sign that recovery could well be around the corner.

In simpler terms, if macroeconomic conditions improve over the next few quarters, discretionary spending in technology and telecommunications is likely to return for the IT services company. At present, despite a flat overall year for TCS and Infosys, tech and telecom represent mid to high-single-digit declines in revenue. For Wipro, this decline was even sharper. Even as HCL Tech expects some growth, its telecom revenue growth is an outlier due to the effects of a single deal, and cannot be taken as a trend for the entire vertical.

Discretionary deals offer large margins of profitability for the service providers, which in turn helps the overall industry thrive.

Nevertheless, if conditions improve, a reversal to mid to high-single-digit growth in vertical-wise quarterly revenue could help the IT services industry, as well as its top four, to return to a year of growth that investors would dearly wish for right now.

By Vernika Awal

feedbackvnd@cybermedia.co.in