Sluggish BFSI and retail verticals to impact Q3 growth of IT firms: Sharekhan

The long holiday season in the US and Europe, as well as the sluggish growth in the BFSI (banking, financial services and insurance) and retail sector, is expected to slow down IT growth in the third quarter, according to Indian brokerage firm Sharekhan.

Generally, the third quarter is a soft one for IT services firms due to the holiday season, but Sharekhan predicts that there will be a lower technology spending by financial firms as well. The firm said that the top five Indian IT companies, which include TCS, Infosys, Wipro, HCL Tech and Persistent, are expected to deliver 0.8% to 2.1% q-o-q revenue growth by end of Q3 for the ongoing financial year 2020.

The overall revenue growth of tier-1 IT companies is expected to be moderate in the medium term, mainly due to the weak tech spends by financial firms in USA and Europe, especially in the sectors of capital markets and banking. Additionally, there is an expected delay in decision-making by IT companies owing to macro uncertainties, such as the upcoming US elections, Brexit, trade wars and slow global economic growth.

Apart from retail sluggishness, the slowdown in the automotive segment is also expected to add to the slowdown in the pace of growth.

“Demand from global BFSI clients is expected to remain weak in the near-to-medium term, owing to weakness in capital markets and negative yielding bonds across key developed markets (particularly in Europe),” the release stated.

The retail sector in Europe is especially expected to see a slowdown due to slowing economic growth in Europe and Brexit, which will impact Indian IT companies directly. Apart from the US elections, the increased scrutiny of applications under new visa rules is also expected to delay deal closures.

“Despite these headwinds, the demand environment remains healthy, which is evident from the large deal momentum, robust deal pipeline and acceleration in core transformation works by large global enterprises,” Sharekhan said.

However, the slowdown is expected to continue as operating profitability will remain under pressure due to higher attrition, higher onsite expenses and higher transition costs in large deals. Sharekhan said that the brokerage’s general advice is to stay neutral on the IT sector this year.