The global aviation sector is going through its biggest slump ever, and that has a direct impact on Indian IT companies. According to experts, this impact could lead to 1-7 percent drop in revenues in the coming quarters.
This is especially hard on companies that have high dependence on the travel industry such as NIIT Technologies, Hexaware and Mindtree.
Though it is unclear how long the impact will last, CEO of Hexaware R Srikrishna said in a recent investor call that the company expects two quarters' delay in demand recovery owing to the financial impact of the coronavirus outbreak on the travel and transport (10 percent) sectors, and also on education and retail, where the exposure is low.
Airlines are cutting down on discretionary spending
Globally, aviation industry is one of the worst hit by the novel coronavirus. Airlines are working at a fraction of their capacity, laying off employees and cutting down on discretionary spending to a large extent.
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This is where IT firms will take a hit. Most of the discretionary spending goes into IT, and recently into ambitious digital projects. In the coming quarters, these clients are unlikely to spend on IT and if they do, it will mostly be need based.
Sanchit Vir Gogia, founder, Greyhound Research, an analyst firm, explained that clients will rather invest in the smaller and outcome-based projects. These projects will be short term and will cost less than long-term deal wins. (Outcome-based model is a business model where clients pay for results using a product or service rather than the product itself.)
According to Pareekh Jain, founder, Pareekh Consulting, a tech consultancy firm, this might push some of them to go for local outsourcing. “They might also build their own in-house IT, which will reduce outsourcing in general,” he added.
If this happens, it will be a double whammy for the Indian IT service providers.
Most Indian IT services providers such as TCS, Infosys and mid-tier firms such as Mindtree, NIIT Technologies and Hexaware cater to airline and hospitality majors. Unlike the large players, where travel and transportation are not standalone verticals, for Mindtree, NIIT Technologies and Hexaware they account for anywhere between 10 and 30 percent.
That is why it makes them more vulnerable compared to larger IT companies and probably will take longer to weather the impact.
However it is not all dull and gloomy.
A Kotak Institutional Securities' report pointed out that decline in revenue will to some extend be offset by rupee depreciation, lower travel costs and lower variable pay compensation in the March quarter.
Digital services will continue to grow, albeit slowly. Digital services, which account for about 30 percent of overall revenue, were growing at 25-30 percent year-on-year for IT firms earlier. An HDFC Securities note suggests that digital might see 5-20 percent increase in deals.
Apart from travel and transport, healthcare and telecom continue to see growth on the back of the coronavirus outbreak. But as brokerages pointed out, March performance will be critical to gauge the impact COVID-19 will have on the IT ecosystem in general.