IT sector will have temporary setback due to Covid-19: Analysts

K Giriprakash Bengaluru | Updated on April 08, 2020 Published on April 08, 2020

The IT sector may go through a temporary set back during the first half of the new fiscal but is expected to recover during the second half, said analysts and executives at leading firms. 

“While the scare of rising global infection and death is still playing out, investors seem to be ignoring some of the positives such as the quick bounce-back in China, after the flattening of the Covid-19 curve,” said Anand Rathi Research in a note to its investors. There could be job losses at mid and small-tier companies but it won't be significant, they said.

It added that the Indian IT growth in FY21 could be three per cent lower, assuming a recovery in the second half of FY21 and, therefore, there could be no reduction in headcount. Most IT companies have responded to the crisis by moving to 90 per cent delivery home, resulting in five per cent loss in productivity days. 

Some of the top executives at major IT firms across the country who did not want to be named - since few them have slipped into the silent period ahead of the Q4 results - said that there could be a short-term impact on the revenues but in the long term, certain deals might get re-sized. Although, fears of major changes are as yet to be unfound.

“There is obviously less visibility ahead but going forward, the impact will be far lesser,” one of the executives said. 

Larger firms like Mphasis, LTI, and Mindtree have been more efficient. But, smaller companies have taken a harder hit, given their concentrated delivery.

The problem is more on the demand side, than on supply. On a net basis, we assume normalisation (no pent up) in FY22, the note said. 

With regard to Infosys, the second-largest IT services company in the country, an analyst said the company has the ability to efficiently manage from remote systems to ensure timely delivery of the outsourced business. 

“The Covid impact has been seen majorly on consulting business while outsourcing business still remains robust. Direct exposure to the COVID19 affected regions and verticals is sub 1 per cent and it has not seen any meaningful delivery disruption either,” Axis Securities in its March 30 note said. 

The large deal TCV (total contract value) data has been very healthy for the first nine months of FY20 at $7.3 billion up 56 per cent on year on year basis, which gives comfort to growth in the near-term.

Impact on Infosys

One of the major reasons for Infosys to remain impact-free from such huge disruptions is because its engagement with its partner network has expanded beyond certifications into set up of co-innovation centres, building industry solutions, ISV partnerships and joint sourcing of deals. 

These partnerships play a significant role in implementation, rollouts and upgrades, validation and support services. The recent deal trend continues to be healthy for Infosys and is reflective of traction in manufacturing/industrial, and retail, and CPG verticals. 

Infosys also received various digital transformational deals worth more than $1.8 billion in the recent quarters.

The company believes that Covid outbreak will create huge opportunity across geographies for Infosys to post strong organic growth over different verticals. 

Anand Rathi said companies exposed to US BFS (banking, financial services) and telecoms are likely to see lower cuts than in retail, travel and energy. Banking services are considered essential hence, likely to partly escape global lock-downs. 

US banks are developing new credit products for customers affected by the Covid-19 shutdown, utilising IT services.

It also said the global economy may bounce back faster than expected. China’s GDP ($15 trillion) is more than major Europe countries combined (Germany, the UK, France, Italy, Spain) $12.7 trillion. Therefore, China’s economic recovery is likely to have a net positive impact on global growth even if Europe’s continues to be slow. 

“Despite these positives, the negative impact of the global Covid-19 outbreak on overall IT demand (and, thereby, the financials of IT companies) is likely to be much higher and more prolonged than we anticipated at the beginning of the outbreak,” the note said.  

Published on April 08, 2020

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