Info-tech

IT firms set for quick recovery as tech spend picks up in US, Europe

K Giriprakash Bengaluru | Updated on September 09, 2020 Published on September 09, 2020

Technology revenues will see a growth of 1.4 per cent in 2020 and 9 per cent in 2021, according to data company Rifinitiv   -  istock.com/sesame

As Covid hastens digital transformation, clients even paying vendors in advance

Indian IT services companies, which receive most of their revenues from the US and Europe, may see a recovery faster than other sectors as spending picks up by clients pushing for enhanced digital play and taking advantage of the benign credit conditions in developed markets.

A few top-tier IT services companies and analysts told BusinessLine that while customers had embarked on digital transformation journeys at varying speeds in the past, Covid-19 has accelerated the process significantly. The current crisis is largely perceived to be worse than the 2008 global financial turmoil, but industry watchers believe that IT spend in 2020 will hold up, comparable to 2019 levels.

A top executive of a leading IT services company, which was among the three to come out with a guidance, told BusinessLine that there was better demand visibility. “The situation is far better than we expected largely because of the fact that our clients are backing their digital transformation with top dollars.”

Debashis Chatterjee, CEO and MD, Mindtree said: “We do anticipate recovery for the IT sector to be faster than many other sectors but that is also due to the inherent nature of the this sector. The pandemic has provided a huge opportunity to not just help existing clients, but widen the horizon to industries that were traditionally not IT driven or had little dependence on IT. This has also meant growth, especially in the areas of Cloud, Data Security and Automation.

“As the clients work on adapting their businesses to the new normal there is a need for more agile solutions with a faster time to market. We expect that this will result in a faster decision making cycle on IT spend on key digital transformation initiatives.

Recovery will continue to remain gradual until the entire economy opens up and a vaccine is found. One of the worst hit sectors was the travel and hospitality segment. This too is slowly beginning to show signs of recovery. Some of the sectors like consumer, media and technology, consumer packaged goods, and BFSI are starting to show green shoots of recovery.”

Girish Pai, Head of Research at broking firm Nirmal Bang, wrote in a note to investors: “Based on commentary from customers, software companies and IT services vendors, we believe that digital demand has been pulled forward from the future. We even had customers extending advances to vendors. The cheer was more widespread than anticipated.”

Faster comeback

An analyst with Frost & Sullivan said that IT services companies might recover faster than expected as the economic growth is returning in the US and in Europe. “IT services companies are more dependent on the global economy and hence for them, it will be a faster comeback than the other industries,” Frost & Sullivan’s vice-president, Digital Transformation Practice, Benoy CS, said.

According to Rifinitiv, a global provider of financial data, technology revenues will grow 1.4 per cent in 2020 and 9 per cent in 2021. “Fiscal measures taken thus far by the developed world have far exceeded those taken during the global financial crisis in 2008-09,” Nirmal Bang’s Pai said.

US’ stimulus package

The US announced a $2-trillion package in March 2020 and followed it up with an additional $480-billion stimulus in April. Another round of stimulus is now under consideration by US Congress.

Pai said one of the reasons for higher liquidity in the market was the quick and unprecedented ‘whatever-it-takes’ monetary and fiscal actions in the US and Europe that likely eliminated tail risks to economic recovery and reduced risk aversion among corporates.

“Based on commentary from customers, software companies and IT services vendors, we believe that digital demand has been pulled forward from the future. We even had customers extending advances to vendors. The cheer was more widespread than anticipated,” Pai said in a note to investors.

Mahesh Babu, an analyst with Centrum Broking, said that the situation was not as bad as was expected to be. “We expected a much larger decline. Overall, there is a low-interest-rate environment in the US and elsewhere. There is a lot of liquidity in the market and that is one of the major reasons for interest here,” Babu said.

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Published on September 09, 2020
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