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Energy Crisis, Macroeconomic Headwinds to Weigh Down IT Firms

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Analysts say that the energy crisis in Europe and macro-economic headwinds are weighing on the outlook for IT service segments like retail, manufacturing and automotives.

Analysts denoted that firms across the European Union (EU) and UK are under severe cost pressure.

An IT consultancy firm, ISG noticed a slowdown in decision making across these sectors, especially in Europe, said IT consultancy firm.

Europe accounts for over 25 percent of the revenue pool of Indian IT service providers like Tata Consultancy Services (TCS), Infosys, and Wipro among others, with many of them dealing with global retailers, manufacturers and automakers in the region.

The inflation in the euro zone touched 9.1 percent due to spiralling fuel prices, forcing many small businesses to suspend operations this year. However, Indian IT service providers generally engage with the larger companies in this space.

“Pressure to reduce prices and any pricing concessions will put significant pressure on margins of IT service providers at a time when wages continue to rise both in India and in the EU and UK,” says Bendor-Samuel

IT companies such as Zensar forecasted pressure on retail and manufacturing segments, while Accenture’s realignment of talent supply made experts concerned about the ability of IT services clients to spend.

Additionally, analysts raised client-specific delays in segments like telecom and high-tech verticals —consumer electronics, telecom operators, and telecom infrastructure - which will impact companies like Larsen & Toubro Engineering Services.

Peter Bendor-Samuel, chief executive of Everest Research, indicated that the EU and UK could be stepping into hot waters as their firms are under severe cost pressure.

“Pressure to reduce prices and any pricing concessions will put significant pressure on margins of IT service providers at a time when wages continue to rise both in India and in the EU and UK,” says Bendor-Samuel.

He adds that Other measures can be taken to mitigate the impact, such as reducing variable compensation, moving more work to India and increasing the percentage of freshers in the mix.

These concerns were first flagged by Mindtree during its first-quarter results, when it pointed out that clients had been impacted by the Russia-Ukraine conflict and supply chain issues emanating from China, which were impacting retail and the Consumer Packaged Goods verticals across UK and Europe.

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