The Sectors Driving Digital Business Of Indian IT Firms During Pandemic

Digital services was among the fastest growing business for India's information technology companies even prior to the pandemic. Covid-19 is expected to accelerate this growth as global and Indian clients ramp up their spending on cloud computing, artificial intelligence and internet of things.

Consumer goods makers, retailers, and financial and healthcare service providers are among the sectors that have seen higher spending on digital services demand moved online during lockdown. Tata Consultancy Services Ltd., Infosys Ltd., Wipro Ltd., HCL Technologies Ltd. and Mindtree Ltd. confirmed the trend after their first-quarter earnings.

Outsourced IT spending services is expected to grow 6-8% during 2021-24 from an average of 4.5% in the last 10 years, according to the market researcher Gartner, buoyed by increased digital transformation spending. Nasscom, the Indian IT lobby group, said in a recent report that net global spending on digital solutions is expected to nearly double to $2,711 billion in the four years through 2023, with focus on cloud computing, big data and artificial intelligence.

Outlook On Digital Spends

Global corporations across sectors have said that they will strengthen digital services during the pandemic.

Retail

The American retail store chain Kohl’s Corp. said at its earnings call for the quarter ended June that it invested in digital and omnichannel assets that are important to its functioning. Digital platforms have emerged as primary drivers of consumer traffic for retailers globally as economies went under lockdowns to curb the pandemic’s spread.

Inditex Group, which owns brands like Zara and runs stores in India with Trent Ltd., said in a statement that it plans to more than double online sales to 25% by 2022. It also plans to invest $1 billion in capex in digital platform initiatives.

Consumer Goods

Unilever NV said online shopping is here to stay even after social restrictions are no longer in place, while Nestle SA said e-commerce was instrumental in driving up the food company’s market share overall.

While Unilever said in a statement its e-commerce sales rose by 200 basis points year-on-year to 6% in the first half of 2020, Nestle said e-commerce penetration in retail has risen to 12.4% during the same period compared to 8.5% in the first half of 2019.

Healthcare

The lockdowns imposed across the world led to exponential increase in demand for tele-health and telemedicine offerings, the American health insurer Anthem said, adding virtual health visits during the recent Covid-19 peak, were up 300% relative to pre-Covid-19 levels. On-demand telehealth solutions surpassed 1 million visits in early April, it said. Demand for telemedicine in behavioural health space has also risen with usage at 56 times pre-COVID levels.

Pharma

Novartis AG said its investments in data science and digital technologies has helped minimise disruptions in clinical trials. The drugmaker said its focus areas include use of digital technologies is to get prescriptions faster, to look at diagnosis and patient services.

A Boost For Indian IT Sector

This higher spending will aid Indian IT companies, the biggest provider of software services in the world. That comes when they were already scaling up their digital services, driving transformation for clients.

Indian IT firms have successfully navigated the previous tech spending cycles and they have been able to successfully pivot their business towards providing digital solutions, according to Akshat Agarwal, analyst at Jefferies. This is evident from the growing contribution of digital service revenues, which now stands at 40% for the top five software services providers.

Digital revenues have been driven by a combination of organic and inorganic initiatives and Indian IT firms have invested in research and development and rapidly reskilled their employees, he said in a note. The share of service professionals trained in digital technologies has risen to nearly 80% now from 30% in FY16.

Among listed Indian IT companies, Happiest Minds Technologies Ltd.’s revenue share from the digital segment is the highest, at 96%. The newly-listed company trades at 61 times its fiscal 2020 earnings per share compared with 30 times for most other companies.

Ashok Soota, executive chairman and co-founder of Happiest Minds, told BloombergQuint in a recent interview that while the overall IT market is growing at 8-10%, the digital segment is growing by nearly twice as much.

As digital penetration increases globally, along with its scope of applicability, the high-growth phase for the segment will be further extended from fiscal 2024 to the year ended March 2027 at least, according to Sandip Agarwal, research analyst at Edelweiss Securities.

Increased adoption of cloud is among the main reasons for rising spends in IT services, Kawaljeet Saluja, head of research at Kotak Institutional Equities, said in a report. Clients are looking to cut costs and the online channel becomes the sole mode of engagement for companies with customers during the pandemic.

Saluja said as cloud solutions scale up, Indian IT companies have been chosen as strategic partners for digital transformation programmes of various clients in the last four to five years. They have also tapped into the digital transformation spends, he said.

TCS and Infosys will be at the forefront of this transformation courtesy strong interactive practice, ability to stitch together large integrated deals, strong process capability and comprehensive offerings, he said. HCL Technologies and Wipro have strength in digital infrastructure layer, he said, adding L&T Infotech stands out in select application transformation.

Risks

Key risks for the digital segment include serious data breaches at global tech companies, affecting online traffic, which can have a domino effect on technology spends, Edelweiss Securities said in a report. Among the other risks cited by the brokerage include:

• Adverse currency movements.
• Substantial cut in U.S. technology budgets for digital verticals.
• Delayed revival of travel, transportation, hospitality and retail segments.

Agarwal of Edelweiss Securities said persistent loss of share for Capgemini SE and Cognizant Technology Solutions Corp. in a market comprising fewer players indicates gains for market leaders such as TCS, Infosys and HCL Technologies.

Shares of Indian IT firms have surged this year on higher demand for digital services during the pandemic. The Nifty IT Index jumped about 27% so far this year compared with the Nifty 50's Index’s 4.8% rise. Mid-cap IT stocks Mindtree and L&T Infotech have led the gains and Happiest Minds made a stellar trading debut this month.

The surge, however, has led to concerns about valuations as all the top Indian IT firms are trading at higher than their historical average despite the pandemic.