Analysts and broking houses now say their forecast about the travel vertical impacting the Indian IT services companies most was misplaced. They now believe that the retail sector will be the worst hit for Infosys, Wipro and Mindtree and a few others, as their exposure to retail clients is among the highest.

According to several reports, as many as 13 retailers in the US with 3,800-plus stores have already filed for bankruptcy in 2020 ytd (year-to-date). These include J Crew, True Religion, J C Penny and Stage Stores. Certain others such as Victoria’s Secret and Bath & Body Works are also potential candidates.

“Recovery for surviving retailers will be painful and challenging, hinging on an effective end to the pandemic and a rebound in consumer confidence,” BobCapital’s analysts said.

Analysts said the tech spends by travel and transportation clients were less than 5 per cent of the revenue share compared with 14 per cent revenue share of the top five Indian IT companies.

Tech spends

The same analysts said the street appears most concerned about the impact of a slowdown in tech spends by travel and transportation clients, a relatively small vertical with sub-5 per cent revenue share for top 5 Indian IT services players compared with 14 per cent revenue share “Our view contradicts the street’s narrow focus on travel and transportation, which is hit hardest globally, but accounts for a relatively lower proportion of IT industry revenue — at less than 5 per cent as per our estimates. The pandemic has exacerbated challenges for offline retailers already grappling with online competition,” Bobcaps’ Ruchi Barde and Seema Nayak said in the update to their investors.

Because of the major impact of the crisis on the retail chains, there could be significant cuts in technology spends. This will lead to tier-I Indian IT players facing 100-600 bps drop-off in revenue growth from the retail vertical alone. Among large-caps, Wipro has the highest retail exposure (16.3 per cent), followed by Infosys (15.4 per cent) and TCS (15.1 per cent). Among the mid-caps, Mindtree leads at 20.3 per cent, the note said.

But in a recent interview to this paper, Infosys COO UB Pravin Rao said while some of the sectors will bounce back sooner, some others like retail and utilities will take a while longer. “We will have to take cost out of other places. So it is like repurposing spending in other areas and trying to keep costs under control so that is what is happening but the need for IT or need for IT services will not go away,” he said.

For the fourth quarter, Mindtree witnessed the most growth in hi-tech and media verticals, while in retail, consumer product goods and manufacturing, it saw the least at 3.2 per cent. In an earnings call post the Q4 results, Debashis Chatterjee, CEO and MD of Mindtree, admitted that there could be some softness on the retail vertical in the next quarter.

Struggling retailers

In their note to investors, Bobcaps’ Barde and Nayak also pointed out that retailers across the globe have struggled with the shift to online retail and changing customer tastes. But the coronavirus and government-mandated closures will now push many of the already struggling retailers to bankruptcy.

JC Penny, which skipped two interest payments during the pandemic, is the latest and largest (revenue-wise) to join the list. “We highlight that 6 out of 13 (or 45 per cent plus) US retail bankruptcies this year were in May alone.”

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