IT spending may be decoupling from economic growth3 min read . Updated: 05 Mar 2019, 12:43 AM IST
- Many IT firms say that clients will continue to spend on newer technologies, irrespective of overall growth
- India’s largest IT services firm, TCS, sees this trend only in some industry segments
NEW DELHI : As fast-paced changes reshape global retailers, carmakers and banks, these companies are spending more time and money on digital technologies to ensure that they don’t face annihilation because of disruptive innovation.
The increased spending has led to windfall business opportunities for information technology (IT) companies such as Tata Consultancy Services Ltd (TCS) and Capgemini SE, which say that such structural changes in client industries are gradually leading to decoupling of technology spending from economic growth.
While France’s Capgemini and HCL Technologies Ltd, India’s third-largest IT services company, claim that tech spending has more or less completely delinked from economic growth, TCS maintains that tech spending has decoupled only in some industries.
For over two decades, IT companies’ growth has taken cues from the economic growth in the US and Europe, the two markets that account for the bulk of their revenue. This is because historically, companies, across industries, have spent more on technology in times of good growth and tightened tech spending when growth slowed.
As digital technologies are structurally disrupting most businesses, companies from Citigroup to Walmart are looking at their IT vendors to help them run their business better.
Many IT companies say that clients will continue to spend on these newer technologies, irrespective of overall growth.
“Broadly speaking, companies will continue to spend because if they don’t transform their own business models, they will be exposed to a much bigger threat," Thierry Delaporte, chief operating officer of Capgemini, said in an interview.
Capgemini claims that digital revenue accounted for 45% of its €13.19 billion in revenue in 2018.
At Indian IT firms, including TCS, Infosys and Wipro, digital accounted for 30.1%, 31.5% and 33%, respectively, of revenue in the October-December 2018 period.
“Clearly, we are seeing client spending getting delinked from macroeconomic growth," said C. Vijayakumar, chief executive officer (CEO) of HCL Technologies.
However, India’s largest IT services firm, TCS, sees this trend only in some industry segments.
“At one end, you have an example like retail, where because the industry is in a difficult situation, the technology spend has been definitely decoupled from economic growth," said Rajesh Gopinathan, CEO of TCS. “Then there are other industries like utilities. Here, because of the inherent resilience in their business models, because of their natural monopolies, although the regulators have been trying to break these monopolies, the tech spending is still tied to economic growth."
There are some, like India’s IT lobby group, Nasscom, and Infosys Ltd, which say that tech spending is still tied to global growth.
“For now, tech spend (of clients) is still very much linked to economic growth," said U.B. Pravin Rao, chief operating officer of Infosys. “This is because any slowdown in economic growth will impact a company’s growth and consequently the tech budgets of a client."
Infosys’s view is mirrored by Nasscom.
“If the question is ‘if economies of the world are not doing well, will corporations continue to spend on digital?’, I would submit no. So, for now, there’s no decoupling (between economic growth and performance of IT firms)," Nasscom chairman Rishad Premji said in an interview last year.
Most analysts agree, and say that is why IT stocks can still not be viewed in the same league as consumer staples such as Hindustan Unilever Ltd (HUL) or ITC Ltd.
“There is a reason why consumer staples enjoy a premium over IT stocks, because, irrespective of economic growth, people will continue to buy the products of a company like HUL," said a Mumbai-based analyst at a domestic brokerage on condition of anonymity. “Enterprise IT spend is still a function of macroeconomic growth and for this reason, it will be incorrect to assume that IT stocks should be viewed as consumer staples."