Resilient show by the IT sector

| Updated on October 19, 2020

The IT sector has demonstrated creditable resilience during Covid, but there are clear signs of maturing growth

Indian IT services majors have repeatedly demonstrated their ability to make hay even when the sun isn’t shining on the global economy. Their results for the Covid-ravaged July-September quarter offers evidence of this. Numbers from the sector’s Big Four — Infosys, TCS, HCL Technologies and Wipro — have prompted a flurry of analyst upgrades, after they expanded their revenues by 2-5 per cent in constant currency terms when a slide was expected, improved their operating profit margins by 100-300 basis points and offered positive commentary on the outlook. It was widely feared that pandemic-related business disruptions would prompt a cutback in global IT spends as CXOs embarked on a cost-cutting spree. While cost cutbacks were in vogue, IT firms managed to capitalise on deal wins from business transformation initiatives as global companies scrambled to enhance their digital presence and migrate to cloud services, while consolidating their vendors to save on costs.

This translated into a record number of transformational deal wins this quarter with significant additions to the new clients roster. While the manufacturing and infrastructure verticals delivered muted growth, retail and BFSI picked up the slack. On the profitability front, the gains came from both structural and temporary changes. Global travel restrictions and visa curbs in the US — which were expected to crimp opportunities — turned out to be a blessing in disguise, as players eked out better margins from sharp cuts in their travel expenses and higher offshoring. Deferred wage hikes and sharply lower attrition thanks to the bleak hiring scenario helped save on operating expenses. But as business normalises after Covid, it is quite likely that Indian vendors will be forced to give up some of these margin gains to their clients by way of price reductions, as the latter insist on more onsite hiring and a pass-through of the savings from work-from-home initiatives. It is perhaps for these reasons that despite the good numbers, the Big Four have remained cautious with their revenue guidance — pegging it at 1-3 per cent (constant currency) for the year.

From a macro standpoint, while the resumption of IT sector hiring and pay increases augur well for the economy starved of consumer spending, it is quite clear that the sector can no longer be relied upon to significantly add to its four million strong workforce every year or hand out double-digit pay hikes. To adjust to the new normal of profit, rather than revenue-led growth, players will continue to push for automation and higher variable pay, focussing on qualitative hires rather than headcount. The string of share buybacks and higher dividend payouts from the sector leaders in the past year point to fewer opportunities for redeploying cash. Both investors and policymakers need to acknowledge that the IT sector is well on its way to transitioning from a high-growth industry to a relatively mature one.

Published on October 19, 2020

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