Top Indian software services companies are expected to have a tough year in FY21 amid continued weakness in demand from the banking, financial services and insurance (BFSI) and retail verticals.
“With continued challenges in the capital markets segment and large banks in US/Europe, and heightened volatility in the retail vertical, we clearly expect revenue growth to decelerate in FY21 to about 7.5% in constant currency terms for our large cap coverage," ICICI Securities said in a 15 December note. The BFSI sector has been relatively weak for the past few quarters. Tata Consultancy Services’ (TCS’) BFSI vertical witnessed slow single digit growth at 8% year-on-year for the quarter ended September.
For Infosys, BFSI revenue grew slightly higher at 10.3% year-on-year in constant currency terms, which is “pretty decent", according to an equity analyst. However, he said that “one should also consider that this includes the impact of the Stater acquisition, which obviously boosts growth." Infosys, which acquired 75% shareholding in ABN AMRO Bank’s wholly owned Stater NV in May, aims to strengthen its position in the mortgage services value chain.
“The financial services vertical continued its growth momentum aided by the recent Stater acquisition," U.B. Pravin Rao, chief operating officer, Infosys, said during the September quarter post-earnings call with investors.
“We expect performance in the vertical to be affected in the next couple of quarters driven by seasonality, sluggishness in capital markets and the European banking space. The recent reduction in interest rates in major geographies can have an impact on client revenues, which may also impact their IT spending," he said.
Harit Shah, a former equity analyst with Reliance Securities, corroborated Rao’s views. “BFSI spending is seeing some softness mainly in the capital markets segment. With interest rates at very low levels, the impact of trade wars likely to be felt, slowing gross domestic product growth, and overall macro challenges, it is likely that the BFSI spend will remain soft in the near term," Shah said.
Revenue from retail grew in single digits across TCS, Infosys, and Wipro at 4.8%, 1.1%, and 6.1%, respectively year-on-year on a constant currency basis for the September quarter. “Retail segment performance was muted as clients turned cautious because of an increase in perceived risks stemming from trade wars and geopolitical developments," Rao said about the Q2 earnings of Infosys.
Analysts believe retail will continue to be a drag in the coming quarters. “The IT companies’ commentaries have been soft on the retail sector because of factors such as the US consumer confidence index going down quarter on quarter. Also, the retail sector is creating pricing pressure for IT services firms, especially for the managed services which includes mandatory services such as application development and maintenance," said Anmol Garg, equity research analyst, Motilal Oswal Securities.
The digital business will follow the trend in 2019 and continue to drive growth for IT services companies as clients will invest in emerging technologies despite a flat budget. “The IT budget is expected to remain almost flat globally in 2020 for many organizations (based on a survey conducted in 991 organisations globally)," said D.D. Mishra, senior director analyst, Gartner. However, he said that “net investment in certain areas such as analytics, data and information strategy, application support, and end user computing, across verticals is expected to increase."
Banks will continue to invest in new technology as part of their digital transformation initiatives, according to a Deloitte Insights report. North American banks are expected to spend 40% of their total IT budget on new technologies in 2020, while European banks would spend about 29%. This number would increase to 48% and 33%, respectively for American and European banks in 2022.