Indian IT Had A Solid Quarter But Faces Unpredictable, Ill Winds In 2019

Analysts may not have been thrilled by TCS' recent performance which narrowly missed estimates. However, those that do not live or die according to stock market figures would be pretty pleased with the way the Indian IT giant performed in the third quarter of fiscal 2019.

For one, TCS posted double digit year-over-year growth of 12.1 percent for the first time in several quarters. It also recorded a staggering 24 percent rise in quarterly profit and snagged an impressive $5.9 billion worth of new deals in the quarter. 30 percent of its business is in the digital realm, which grew at a 52 percent clip from the year prior, and is clearly the driving force in the company's growth trajectory.  

TCS' rival Infosys didn't do too bad either. Its revenues of $2.99 billion increased by 8.9 percent compared to last year. The company also inked 14 large deals worth over $1.57 billion, and its digital revenues account for 31.5 percent of its business which grew at a 33 percent rate year-over-year.

For an industry that was railroaded both by Trump's H-1B onslaught and the commoditisation of its bread and butter -- infrastructure maintenance application development business -- these are pretty impressive numbers.

The question is, how long will this ride last? Are there any monsters lurking in 2019 that could upend this against-all-odds performance?

Also: While India's IT managers get the axe, old world coders get a lifeline

Even the most sanguine of seers will see a pretty rocky road ahead, much of it beyond the control of Indian firms. Interest rates appear to be rising and Asia looks to be slowing down according to Bloomberg Intelligence. Additionally, worldwide IT spending growth, according to research and advisory firm Gartner, is predicted to fall from 4.5 percent to 3.2 percent year-over-year. However, the thing that could have Indian IT reeling is the fiasco that is Brexit.

Deal or no deal, Britain's exit from the EU could have serious ramifications for Indian companies. The UK accounts for 18 percent of business and Europe around 11 percent. Many IT companies have their EU headquarters in the UK and use the country as a launchpad for doing business across the channel. According to Quartz, around 800 Indian IT companies currently have exposure to the UK, and they employ around 110,000 people there. So it doesn't take a great imagination to realise that Indian companies could get hit badly by the volatility of the British pound as well as the ongoing uncertainty about future policies between the UK and Europe, especially when it comes to financial and banking systems.

Quartz also pointed out Indian IT companies may need to shell out significant amounts of cash and suffer the headache of opening separate offices for the EU and the UK post-Brexit. It is also likely that businesses on both sides of the channel will think twice before spending big on new, higher-margin, digital transformation deals in the wake of this turmoil, with the only saving grace for Indian IT being the continued depreciation of the rupee which would make its offerings a little sweeter.

Read: Apple talks big about India, but its revenues are tanking

Then, there is the issue of talent. The binge of local hiring that most Indian IT majors have carried out in the US has immediately impacted their margins and will continue to do so, with TCS' margins falling by 90 basis points over Q3 largely because of this. However, the more serious issue facing them is the shortage of mid-level talent as Mint newspaper points out. This means more sub-contracting, as well as a greater reliance on near-shore or off-shore centres which also eats into margins.

Lastly -- and this could be the final nail in the coffin for 2019 -- is the spectre of a US slowdown coupled with an ongoing debilitating trade war that deters eager US businesses from vaulting into a digital solutions realm. The US constitutes between 55 and 70 percent of revenue for the top five Indian IT companies and a severe downturn -- lets not even utter the words 'second financial crisis' -- would be a nightmare.

Lastly, turning the screws up a notch in a bad situation are captive centres who seem to be taking bites out of Indian IT. Companies using captive centres are finding out that running their own show can sometimes be vastly more cost effective than paying someone else to do the job.

So despite the large number of IT deals up for grabs this year, Indian IT may have more to contend with than it originally imagined, and it will take continued resilience and innovation to survive and continue to meet those numbers.

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