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The proposed H1-B visa rules, if implemented, will work against the Indian IT services sector.
The proposed H1-B visa rules, if implemented, will work against the Indian IT services sector.

Pandemic’s impact on Indian IT can be different from previous 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
  • Investors appear to be a bit sanguine about the impact of Covid-19 on IT demand

Clearly, there are no parallels to the Covid-19 pandemic in recent history. But if one has to draw inferences from the last big crisis, then the experience during the Global Financial Crisis (GFC) provides some hope for India’s IT services companies.

While, growth rates have been considerably lower since FY11 compared to pre-crisis levels, this has largely been because of the base effect.

At Tata Consultancy Services Ltd (TCS), for example, the compound annual growth rate between FY05 and FY08 (pre-crisis) stood at 36%. This halved to 18% post-crisis in FY11-FY14, and further to 9% in the next three years. 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 average each year post-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-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, including price resets and a greater shift towards insourcing, soon after the crisis.

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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 warned of significant cuts in IT spending budgets in 2020. This can impact demand for two-three quarters, itself.

Analysts at Kotak Institutional Equities estimated 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 GFC, which only impacted demand, Covid-19 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," said Nomura Research in a note.

But note that stocks of industry leaders, such as TCS and Infosys, have fallen only about 20% from their peaks earlier in the 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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