Oil price crash weighs on Indian IT service companies

The fallout of oil prices hitting their 13-year low is now beginning to reflect on Indian IT service firms. Going by the third quarter earnings of the IT companies, falling crude price is leading to cut down on projects from energy vertical.

Infosys’ Chief Operating Officer Pravin Rao, in a post results conference call, said: “Only industry where we can talk with confidence where we are seeing lots of pressure is on the energy side because of oil prices. There is definitely pressure and budget cuts.”

Infosys’ profit before tax from its energy unit declined over 1 per cent sequentially although revenue from the unit grew 3.5 per cent sequentially.

Though Infosys delivered better than expected Q3 results, the company also has the largest exposure to energy segment among peers. While 18.3 per cent of Infosys revenue comes from energy and utilities, Wipro has 14.4 per cent exposure and TCS just 4.1 per cent. Yet, all these IT service majors are worried about the impact of oil prices on their business. (Infosys also clubs communication and services revenue along with its energy and utilities revenue.)

For Wipro, revenue from energy vertical has fallen from 16.4 per cent in Q3, 2015 came to just 14.4 per cent in Q3, 2016.

Wipro CEO Abidali Neemuchwala raised his concerns over uncertainty in energy business because of oil prices during the company’s most recent conference call. “Energy and utilities is an area of great strength and we are also quite exposed to that area. And we've still not seen the bottom if we look at it from an oil prices perspective. So there is a level of uncertainty over there.”

For TCS, Energy and Utilities was the second slowest growing business vertical in the third quarter with just 1.6 per cent sequential growth after BFSI, which was down because of challenges in its Insurance business.

TCS said it expects the pressure from its energy segment to bottom out by the end of this quarter. “The energy vertical would have bottomed out by the end of the quarter,” said TCS CEO N Chandrasekaran.

The worries may continue through the fourth quarter with oil prices expected to fall further, partly impacted by lifting of trade sanctions against Iran, which will result in oversupply in an already pressured oil market.

“In the first two weeks of the year, both WTI and Brent settled below $30/bbl and a procession of investment banks has warned that oil prices “could” fall to $25/bbl, $20/bbl or, in one case, $10/bbl. While the pace of stock building eases in the second half of the year as supply from non-OPEC producers falls, unless something changes, the oil market could drown in over-supply,” said a report by International Energy Agency.