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Business News/ Companies / News/  COVID-19 impact on Indian IT can be different from 2008 financial crisis
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COVID-19 impact on Indian IT can be different from 2008 financial crisis

Growth rates have been considerably lower since FY11 compared to pre-crisis levels
  • At TCS, the compounded annual growth rate between FY05 and FY08 stood at 36%
  • Photo: BloombergPremium
    Photo: Bloomberg

    Clearly, there are no parallels to the COVID-19 pandemic in recent history. But if one has to draw inferences from an event of this scale, then the experience during the global financial crisis of 2008 provides some hope for India’s IT services companies.

    Indian IT exports’ growth fell from about 30% in FY08 to 16.8% in FY09 and 5.8% in FY10, data collated by Nomura Research shows. But as financial markets stabilised, IT exports bounced back, aided by market share gains.

    Growth rates have been considerably lower since FY11 compared to pre-crisis levels, but this is largely because of the base effect.

    At Tata Consultancy Services Ltd (TCS), for example, the compounded annual growth rate between FY05 and FY08 (pre-crisis) stood at 36%. This halved to 18% post-crisis in the FY11-FY14 period and further to 9% in the next three years and growth in the three years till FY20 is expected to average 8%. But note that in terms of incremental revenues, TCS has added about $1.55 billion in revenues on an average each year post the crisis, while incremental revenues were $1.13 billion in the three years before the crisis.

    Some other companies such as Infosys Ltd and Wipro Ltd were worse off because of leadership-related challenges, while some others such as Cognizant Technology Solutions Corp held up fairly well post the crisis.

    On an average, the Indian IT sector has done fairly well.

    But this time could be different. While market share gains helped firms such as TCS report higher incremental revenues, the sector did face headwinds such as price resets and a greater shift towards insourcing soon after the crisis.

    If more and more clients are affected by lockdowns and social distancing, and their impact on the global economy, Indian IT firms would soon witness another round of price resets.

    Nomura Research warns of significant cuts in IT spending budgets in 2020. Analysts at Kotak Institutional Equities estimate sequential revenue declines in the seasonally strong June and September quarters.

    As of now, both Nomura and Kotak foresee a recovery in FY22. However, these estimates are based on the current situation, and things are changing fast. Unlike the global financial crisis, which only impacted demand, COVID-19 (commonly known as the novel coronavirus) is also crimping IT industry’s service capabilities.

    So the financial impact can be more pronounced this time. “The key to watch would be the length and extent of COVID-19 spread in western geographies, especially the US, which contributes 55-60% of revenues for Indian IT; and extent of spread in India, which can further disrupt service delivery for clients," Nomura Research said in a note.

    But note that stocks of industry leaders such as TCS and Infosys have fallen only about 20% from their peaks earlier this year, which is far better than the rest of the market. Investors appear to be a bit sanguine about the impact of COVID-19 on IT demand.

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    Published: 26 Mar 2020, 04:14 PM IST
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