The start of the year in India’s IT sector bears similarities to the Eurozone Crisis of 2012. Outsourcing is the industry in India with the highest outsourcing concentration. So it’s natural for experts to be wary of well-known software firms like Tata Consultancy Services Ltd. and Infosys Ltd. due to concerns about a global economic downturn. They are more concerned with the current fiscal year, which will end in March, than with the traditionally slow December quarter. The twelve months beginning in April can be more difficult. Given that Europe is the center of pessimism, analysts make comparisons with the 2012 sovereign debt crisis in the region.
Repeating that experience can make healing a long and slow process. Although a decline appears imminent, Tata Consultancy’s financial reports on Monday provided some new indications of just how dire it would be. Anxiety in Western Europe appears to have been offset by the expansion of a decade-long alliance with UK retail client Marks & Spencer Group Plc and a transaction with US biopharmaceutical company Gilead Sciences Inc.
India’s most valuable software exporter reported revenue of $7.08 billion, up 8.4% from the same period in 2021. $1.3 billion in net profit was virtually unchanged from a year earlier. In a post-earnings press conference, CEO Rajesh Gopinathan stated that “we went into December with everyone being cautious.” However, in our view, the nuance of this caution varies across markets.
However, the Mumbai-based company is being careful. Its headcount was reduced by just over 2,000, marking the first headcount reduction since June 2020. TCS has managed to increase its operating margin, which was around 23% six months ago and is now 24.5%. However, profitability is only part of the story; investors also need a better understanding of the entire order book. For TCS and Infosys, a rival company based in Bangalore, the expected increase in dollar sales for fiscal 2018 is about 10%.
That’s a little too hopeful. If the next downturn is something like the 2008 financial crisis or the pandemic that opened the floodgates to new orders, it’s fair to predict such a quick reversal. However, if the 2012 European recession serves as a more useful analogy, it may take much longer for customers to regain their confidence.
Therefore, investors will be very interested in Infosys’ earnings release on Thursday. The number two Indian player had such a flagrant underestimation of the 2012 crash and its effect on European banking customers that he, after consistently failing to deliver on his promise, withdrew his quarterly revenue prediction in July of that year. According to a report sent to clients last month by Mumbai-based brokerage firm JM Financial Institutional Securities Ltd., “consensus forecasts routinely exceeded Infosys’ initial guidance, which exaggerated subsequent growth, including during the crisis.” of the euro zone of 2012″. “A similar trend could indicate a progressive downward revision of earnings for an extended time.”
This time, the staff from the time of the epidemic have added complications. TCS experienced growth of 172,000 employees over nine quarters beginning in June 2020, as customers rushed to digitize supply chains. Now, demand is returning to a more typical pace. On the other hand, corporate customers haven’t exactly started coming up with big IT initiatives to cut costs, either: they’re all waiting and watching.
70% of jobs for programming code in India come from IT outsourcing companies. The local start-up sector is the other major employer in the area, although it is now laying off many workers due to a shortage of financing. The general conclusion for software developers is simple: it may not be a good idea to leave your job this year.
However, even if the profitability of Indian software exporters stabilizes, thanks to tighter controls on staff costs and a 10% drop in the value of the rupee against the dollar over the past year, the order book It can shake if European customers cancel or postpone major IT projects. projects. The biggest concern right now is a recurrence from 2012.
eurozone debt crisis
When the world first learned that Greece might default on its debt in 2009, the crisis officially began. It grew in three years to the point that defaults on the national debt of Portugal, Italy, Ireland and Spain were a real possibility. It was difficult for the European Union to help these members, which was led by Germany and France.
They requested bailouts from the International Monetary Fund (IMF) and the European Central Bank (ECB), but these actions did not stop many people from doubting the sustainability of the euro itself.
The eurozone debt crisis was the biggest threat to the world in 2011, according to the Organization for Economic Co-operation and Development, and it only got worse in 2012. The value of the Turkish lira fell to a record low against the US dollar. after President Trump threatened to impose double tariffs on Turkish aluminum and steel imports in August 2018, reigniting concerns that the weak state of the Turkish economy could lead to another eurozone crisis.
Many European banks have investments in Turkish lenders or have lent money to Turkish companies. The probability that these borrowers will be able to repay these loans decreases as the value of the lira falls. The European economy could be negatively affected by defaults. First, Merkel’s proposed deal was rejected by the UK and many other non-eurozone EU nations. They feared that the deal would result in a “two-tier” EU. Eurozone nations could draft preferential agreements that would apply exclusively to their citizens and exclude non-euro nations from the EU.
Second, eurozone member states must accept spending cuts that could limit the growth of their economies, as happened in Greece. These austerity measures have had a bad political response. Voters can choose new leaders who could leave the EU or the eurozone. Third, a new financing option called a Eurobond is available. The €700 billion of Eurobonds used to support the ESM are fully guaranteed by eurozone member states. Like US Treasury securities, these bonds can be bought and sold in a secondary market. Because they compete with Treasuries, Eurobonds can increase US interest rates.
Debt rating firms including Standard & Poor’s and Moody’s called on the ECB to step in and guarantee all loans made to eurozone nations, but Germany, the EU’s largest member, objected because there were no guarantees. 13 It forced debtor countries to enact the austerity measures necessary to establish their finances. Investors worried that austerity measures would simply prevent any economic recovery and that debtor countries would depend on that expansion to pay off their debts. Even if austerity measures have negative effects in the short term, they are essential in the long term.
Edited by Prakriti Arora