🤯 Recession to Hit India's Silicon Valley?
The IT sector is famous for being recession proof. But the current global scenario may make it difficult for them to survive a recession if it comes.
Weddings, funerals and the IT industry: all three are famously recession proof.
That's what Wipro executive chairman Rishad Premji thinks and economists also seem to agree.Â
But with a recession knocking at our door, we can't just take their word on face. So, we're here to analyse how true this statement is.
🤔 Why Recession Proof?
First things first, let's understand why people think IT is recession proof.
Well, one reason is that even though most companies cut down on costs during a recession, they don't really skimp on software and other tech services because they're essential to their day to day operations.
If an accounting firm was using a tech software to manage operations, it would not suddenly stop using it because of a recession.
Secondly, when a recession occurs most industries are looking to cut costs and turn to software and automation to do so.
So, the industry often survives a recession.
An exception was the 2008 financial crisis when major firms across the world stopped making major business decisions and focused more on layoffs.
However, most people are still looking at the IT industry with rose-tinted glasses because of how important digitisation has become in the last few years.
And an initial look at the tech companies' reports supports their optimism.
Infosys, which is India's second largest software exporter, saw a revenue growth of 23.6% in Q1 2023, beating investors' expectations.
HCL and TCS also saw a revenue growth of 15.6% and 15.5% essentially.
So, it doesn't seem like the current high inflation has impacted their growth and that a recession will impact them.
But, let's take off the rosy glasses for a minute and look deeper into their financial reports.
😲 A Cause for Worry
The operating margins (basically the amount of money these companies earn per sale) have dropped like crazy.
Their profits have also either grown marginally.
Why is this happening?
Well, the growing demand for tech is a double-edged sword.Â
While it has increased the companies' revenues, it has also increased their costs.
Thanks to growing demand and a return to the office, rents in Bengaluru, the Silicon Valley of our country, have increased by 12%.
This is thrice as high as the increase in Singapore or Sydney.
What's more, the growing demand has also opened up multiple job openings for tech workers. So, the attrition rate (the rate at which employees are leaving) is growing.
So, these companies have to spend more money on hiring and on retaining existing workers.
And more problems may soon be piling on.
Umm, what?
Yes, with the economy opening up, these exporters may also have to send a lot of their workers abroad to work with clients.
The costs of flights, visas and foreign offices will weigh heavily on them.
Especially as the rupee is growing weaker and weaker against the dollar.
But wait, don't these companies get paid mainly in dollars? So, shouldn't the high dollar prices help them?
Well, sadly no.
You see, because the dollar has gained against the rupee, many clients in the US are not ready to increase the price of their contracts despite the growing inflation.
But the difference in exchange rate is not enough to beat the growing inflation and the falling rupee (in which the companies have to spend).
Furthermore, these companies also get paid in pound and euro, which have also depreciated against the dollar, reducing their overall margins.
Until we can deal with inflation and the falling rupee, things don't seem to look too peachy for these companies.
And all of this is happening before an official recession has hit the US or us.
Under normal circumstances, with things not being so complicated, the IT industry probably would have survived a recession. But a decline in growth in the economy (which would decline their sales and revenue) now could muddle things up for them.
And it is not just Indian tech giants that are at risk.
Even companies like Google, Microsoft and Amazon that mainly rely on cloud computing software sales will be in trouble if a recession hits.
Do you think these companies will be able to successfully navigate the choppy waters ahead?
âš¡In a line: IT industry is seeing profits drop which could make things difficult for the sector if a recession hits us.
💡Quick question: What do you think the IT sector should do to cut costs and increase profits?
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