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IT Industry to Face a Recession Ahead, Courtesy Covid-19

Top Indian IT services companies such as Tata Consultancy Services (TCS) Ltd, Infosys Ltd and Wipro Ltd (and also the mid-sized ones) are expected to post muted guidance for FY21, with the Covid-19 pandemic leading to a business slowdown worldwide, including key markets such as the U S and Europe. Analysts believe, coronavirus brought about a recession like situation in the IT industry.

Explaining the situation, Naveen Mishra, Senior Director Analyst at Gartner, said, “Various macro-economic research agencies have already undertaken downward revision of 2020 GDP growth rates for many Corona affected countries. Due to this weakening of demand, Gartner is reducing their IT spend projections for calendar year 2020. IT firms must calibrate their near term outlook with these new realities.”

Kotak Institutional Securities pegs the IT services growth at 3-8 percent across the companies. Earlier NASSCOM said the IT industry was set to grow 7.7% to $191 billion for FY20.

V Balakrishnan, former CFO, Infosys that most of the major revenue generators for the IT sector has been hit by coronavirus. “For the IT services sector, banking and financial services, oil and gas, retail and manufacturing are one of the largest revenue generators. All of these sectors were hugely hit by coronavirus.

The uncertainty comes at a period of high growth. The impact will be felt in the quarters ending June and September 2020, he pointed out. “For IT companies, the June and September quarters are the best compared to the third and fourth quarter, which are seasonally weak quarters. The coronavirus pandemic puts a break on business growth,” he said.

“When movement of people gets impacted, any project a company wants to start in the IT space needs people’s presence on site initially, at least for certain time. Once the pace is set, then the rest can be done remotely. The ban on business travel is will thus impact new deals and acquiring new customers. Investments from existing customers, majority of them are impacted by coronavirus, may see an impact as well,” Balakrishnan explained.

Mishra also said that most IT services companies have issued work-from-home (WFH) advisories, but it is not viable for them to offer a blanket WFH to everyone because of issues of infrastructure and client-confidentiality. However, he believes that Indian firms are struggling with remote working or work from home primarily due to three reasons- culture, infrastructure readiness (including ability to safely access client confidential information) and employee orientation to be productive at home,” he said, adding that the situation is leading to a paucity of IT jobs in the country.

For TCS, Infosys and Wipro, banking, which is already under stress, accounts for about 30% of the overall revenue whereas it is 22% for HCL Tech. The oil and gas segment has also been hit badly. Sharp cut in crude oil prices will impact the energy vertical of IT firms. The vertical accounts for about 13% for Infosys and Wipro.

Again with travel and hospitality sector was one of the worst affected by coronavirus, it will directly impact the revenues of Mindtree, NIIT Technologies and Mphasis. This is followed by retail, which accounts for anywhere between 10-15% of the overall revenue for top IT firms.

Last week, data and analytics firm GlobalData too predicted that as the number of new contract showing a consecutive decline over the past couple of months. The drying-up of contracts is an indication that the Indian IT services industry should prepare itself for challenging times ahead.

While the Indian IT services industry has been enduring challenges for a while now, weathering fears of an impending slowdown and the lingering trade war tensions, the recent spread of the outbreak to several countries in Europe and the US will pose a serious challenge as both the regions have been critical for almost all IT services vendors in India.

GlobalData’s IT contracts database, which tracks the publicly announced IT contracts, reveals that the number of IT services contracts signed in February 2020 have shown a monthly decline of 33%. Compared to February 2019, this is an annual decline of 37%. Even in January 2020, the number of IT services contracts was down 15% from the month before.

Nishant Singh, Head of Technology and Telecoms Data at GlobalData, says: “The decrease in the new contract signings for the past two months are from a period when the coronavirus outbreak had been primarily restricted to China and Iran. Given the current spread of the outbreak, we expect fresh contracts to become even scarcer over the next few months.”

Industries like travel and tourism, manufacturing and retail have been strongly affected by the outbreak, and IT services vendors having significant exposure to these verticals could find it challenging to have a healthy order book.

“The next fiscal will be very challenging for the Indian IT services industry as the discretionary spending of clients will be lower as a result of the coronavirus outbreak and new projects are likely to be postponed until the outbreak is contained to some extent. While the Indian IT services industry has proven itself to be resilient time and again, in coronavirus, the industry will face its most difficult challenge yet,” Singh said.

Indeed, some Indian IT services firms are now associating the impact of the coronavirus impact to that of the 2008 recession, and have expressed concerns that the outbreak could affect their financials; although, the implication of the outbreak will probably manifest itself over the next few quarterly earnings.

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Sohini Bagchi
Sohini Bagchi is Editor at CXOToday, a published author and a storyteller. She can be reached at [email protected]