India’s tech industry is ruling out a US recession. Or so you would think from Infosys Ltd.’s cheery forecast of 14% to 16% annual revenue growth, slightly better than what the country’s second-biggest exporter of software services was projecting just three months ago.

The Bengaluru-based firm, which reported its June quarter earnings on Sunday, is considered the industry’s weathervane. If it’s optimistic about orders, then there’s reason to believe that the deal pipeline isn’t drying up. At Infosys’s traditional Bengaluru rival, Wipro Ltd., the EBIT margin fell to its lowest since the September 2018 quarter. Partly that was because it signed up 15,000-plus net new employees, including 10,000 fresh graduates in three months through June 30. (Infosys bumped up its headcount by more than 20,000 during the same period.) But then again, competitor HCL Technologies Ltd., which hit the brakes by slashing quarterly net hiring by almost four-fifths to about 2,000, also saw a lower-than-expected EBIT margin of 17%, a multiyear low.

The margin at Tata Consultancy Services Ltd., the biggest Indian IT vendor, was better at 23.1%, but it was still 2.4 percentage points narrower than for the June quarter of 2021. TCS management has indicated that $7 billion to $9 billion worth of quarterly deal wins could be a sustainable rate. That’s “flattish" from a year-on-year growth basis, Nomura says.  

Profitability might remain under pressure for the rest of this year both because of a slowdown in the West, and the way the industry is structured in India. With the pandemic over, travel and visa expenses are adding up. But the Indian vendors will struggle to get paid more — customers will cite the near-7% drop this year in the rupee as a reason to not bump up the dollar price of contracts. The exchange-rate advantage, however, will be insufficient to make up for the rising pressure of rupee costs.

Ultimately, all of them will resort to “pyramiding" to protect their margins. It basically means putting a lot of inexperienced codewriters under an experienced project manager and hoping that the client will still come out happy. 

The best bet for India’s IT services exporters is to hope that the US economy their most important market will avoid a recession; and that customers who ramped up their digital budgets during Covid-19 will keep giving orders. Will they? Clients may continue to see value in cloud computing, analytics, artificial intelligence and even augmented reality, but their “willingness-to-spend will be constrained by their ability-to-spend" because of “earnings pressure from commodity and wage inflation, supply chain challenges, reduced consumer spending power, higher interest rates and likely below-trend growth in Western developed economies," says Mumbai-based broker Nirmal Bang Securities.

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