Why 2020 Could Be Indian IT’s Worst Year Yet

The global virus outbreak curtails ability to provide services when several countries have imposed lockdowns of varying degrees, India’s being the strictest. And lower demand for IT services from clients over the next few months will further hurt performance.

Aggregate revenue of India’s eight largest information technology companies could grow 4.5 percent in 2020-21 financial year, according to the average of analysts’ estimates tracked by Bloomberg.

Here’s how the performance of India’s software service providers would be affected.

Pressure on Revenues

Software services providers in India and globally have indicated that the next few months are expected to be challenging. April and May are likely to be worst hit on account of lockdowns across the globe, both Tata Consultancy Services Ltd. and Wipro Ltd. said after their fourth quarter earnings. As a result, the first quarter of the ongoing financial year is expected to see revenue contract as, according to their managements, the peak impact is yet to play out.

Rajesh Gopinathan, chief executive officer and managing director of TCS, said at an earnings call for the March quarter that the impact of the Covid-19 for the company will be similar to the global financial crisis of 2008 in percentage terms. TCS’ revenue had declined 5.8 percent and 3.4 percent in third and fourth quarters of 2008-09. Gopinathan, however, didn’t quantify the impact on the ongoing three-month period.

Salil Parekh, managing director and chief executive officer of Infosys Ltd., while agreeing, said they will be pressured due to lower discretionary spending from clients. Infosys is in talks with many of its clients to help them transition to virtualisation and cloud, he said.

Wipro and Infosys have temporarily suspended their practice of providing revenue guidance amid disruptions caused by the outbreak. Infosys, however, suggested that it may provide projections in the subsequent quarters should earnings visibility improve.

Uncertain Outlook

Over the past few weeks, global technology companies either cut yearly sales guidance or withdrew them owing to uncertainties over the pandemic’s impact on businesses.

Accenture Plc. reduced its revenue projection to 3-6 percent from 5-8 percent for its ongoing fiscal. This implies less than 1 percent growth in the remaining six months of the company’s financial year ending August 2020. While SAP cut its revenue guidance to 1-3 percent for the calendar year against 6-8 percent earlier, Cognizant Technologies withdrew its forecast.

Near-Term Challenges

IT companies are expected to face challenges in servicing their businesses over the next few months as many services offered by them aren’t amenable to work from home. TCS, for instance, faced difficulties in maintaining service continuity in its business process outsourcing unit for its banking and financial services segment over delays in securing approvals from clients for work from home, leading to revenue loss.

Some part of this loss is expected to be plugged in the next few weeks, according to Kotak Institutional Equities. Wipro has managed to get approval for 98 percent of its IT services employees to work from home from clients but only 85 percent for its BPO employees because of the nature of work and data security challenges.

Weakened Demand

TCS’ Gopinathan, in a conversation with BloombergQuint, acknowledged that “demand environment is weak across the board”. Abidali Neemuchwala, chief executive officer of Wipro, said global GDP rates are expected to decline by at least 2 percent in the ongoing quarter, but if the weakness extends till the quarter ending September, the decline could be more dramatic.

This will affect customers’ business and earnings, resulting in a cascading effect on their IT spends, he said. “We already see instances of budget reductions, cuts in discretionary spend, request for temporary discounts and pricing pressure, and restructuring of existing spends.”

Bank of America-Merril Lynch said in a recent report that sectors like retail, travel, hospitality, airlines, energy, especially oil and gas, and auto segment in the manufacturing business are experiencing a more immediate and deeper impact. It said the financial services vertical will be dependent on the U.S. and European economies and how their respective central banks deal with monetary policies. Ambit Capital said BFSI demand has historically moderated in periods of low interest rates even as major global central banks take up measures to ease liquidity.

The technology research and advisory firm ISG projected a decline in new deal activity globally. It said that 60 percent of the sector’s clients polled indicated that they had requested for a 20 to 30 percent discount on services over the next two to four months, indicating pricing pressure. Wipro had also indicated at the possibility of certain clients seeking longer payment periods.

Yet, there’s an exception. All companies have suggested that demand for cloud, security and collaborative tools will increase across enterprises over the next few months. TCS and Wipro have said they’ll look to leverage this in the coming months.

Impact On Operating Margins

A weakened rupee may boost operating margins. Productivity has taken a hit as companies adapt to a new environment but the companies expect improvement over the next few weeks. Kotak Institutional Equities said utilisation levels of the companies remain high and employee attrition has been manageable. All companies have so far put salary increments on hold even as they have promised to honour all job offers.

An extension of payment periods can result in higher working capital requirements in the near term that would put pressure on operating margins. There could be lower utilisation levels, CLSA said, adding headcount additions and discounts may offset some of the margin gains.

However, Ambit Capital said the rupee’s depreciation may not be significant. Cost efficiency of services for many companies are already optimised and there are certain challenges of rationalisation of employee costs given that Covid-19 is a humanitarian crisis, it said.