BackCovid-19 impact on IT is not as bad as feared
Things may not be as bad as feared, but investors will do well to ground their expectations a bitIn April, TCS said the impact of the pandemic on its Q1 revenue will be similar to the peak impact during the global financial crisis
PremiumA look at the shares of Tata Consultancy Services Ltd (TCS) suggests the pandemic will hardly have any impact on its performance. TCS shares traded at about ₹2,200 apiece before the markets started correcting in February and are at the same levels now.
Admittedly, while covid-19 has disrupted operations—and this will be visible in the June quarter results—the overall impact of the pandemic hasn’t been as bad as feared. For instance, there have been no large-scale renegotiations on pricing, say analysts. And the recent quarterly results of Accenture Plc. reflect a limited impact of covid-19, with its revenue being largely stable.
Even so, when Indian IT firms start reporting Q1 results, starting with TCS this week, a fairly significant impact lies in store. TCS’s revenue is expected to decline by 5%, both on a sequential and a year-on-year basis, according to analysts at Kotak Institutional Equities.
Things may not be as bad as feared, but investors will do well to ground their expectations a bit.
In April, TCS said the impact of the pandemic on its Q1 revenue will be similar to the peak impact during the global financial crisis. At the time, TCS had reported mid-single-digit sequential decline in dollar revenue for two consecutive quarters.
The near-term impact will be the highest for firms with a larger exposure to troubled sectors such as travel and hospitality, and less for those with larger exposure to sectors such as healthcare and financial services. In short, all companies cannot be painted with the same brush. Kotak’s analysts expect revenues of some firms to fall as much as 9% sequentially.
Accenture’s better-than-expected results cannot exactly be extrapolated for all companies. Its greater presence in digital services and higher exposure to healthcare and public services have helped it win orders and grow revenue. “IT budgets are declining... but clients are focusing on the digital transformation that’s needed to navigate," Julie Sweet, chief executive officer of Accenture, said in a call with analysts.
Sweet also said the firm is starting to see the overall business environment improve. This is a positive takeaway for Indian firms.
“At the beginning of the June quarter, there was general fear and uncertainty," says Nitin Padmanabhan, analyst at Investec Capital Services (India) Pvt. Ltd. “In that backdrop, the quarter has turned out relatively better. Unlike in the global financial crisis, we have not seen any massive pricing cuts across the board so far, which is a big surprise."
Also, to the credit of IT firms, they’ve been quick to adapt to the new business environment —they scaled up work-from-home quickly and minimized disruptions to service delivery.
To be sure, some sectors have been worse hit and the pressure on pricing cannot be wished away.
“While there has been very limited impact on pricing in Q1, much depends on how global businesses see recovery in business after the opening up post-lockdowns, and decisions on pricing may well be taken closer to the fall (autumn) season," said Manik Taneja, an analyst at Emkay Global Financial Services.
“The uncertainty is not coming off. The US is adding more virus cases. We have to see how clients respond. Obviously, there will be spending cuts, the ultimate impact of which will be known only in future," added Padmanabhan of Investec.
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