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IT firms likely to face volatility in BFS space: Report

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The banking and financial services space for IT firms is expected to be volatile in the near term, and escalation of trade wars in the past weeks combined with Brexit overhang may continue to weaken modest optimism of April 2019, says a latest report by Kotak Institutional Equities.

The banking and financial services segment (BFS) is a staple for Indian IT services companies serving global clients, and it accounts for major chunk of overall tech services basket. The tech spends of BFS clients, particularly in US and Europe, impact earnings of IT services firms.

In its latest report on IT services, Kotak said it expects “volatility to continue”.

“Large BFS firms expect a better business environment from April but the external environment has turned for the worse in the past few weeks and…overall tech spending growth will be lower than last year with additional investments funded by higher cost take-outs,” it said.

Banking and financial services companies had a tough start to calendar year 2019, and while the outlook has improved, the risks remain, it cautioned.

Companies expect a more conducive environment for growth in the coming months. Key risks to outlook as reported by companies include slowdown in economic growth, escalation of trade tensions, lowering of interest rates and volatility in equity markets. An additional risk for European firms is the Brexit overhang, it said.

“The escalation of trade wars in the past few weeks and the Brexit overhang can continue to weaken the modest optimism of April 2019,” the report added.

Some BFS firms have indicated greater shift to low-cost locations to manage costs, it said and added that overall the growth in technology budgets of BFS companies would be lower than 2018.

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