Airlines and hospitality majors are slashing budgets and laying off employees to mitigate COVID-19's financial fallout.
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.
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
Frequently Asked Questions
A vaccine works by mimicking a natural infection. A vaccine not only induces immune response to protect people from any future COVID-19 infection, but also helps quickly build herd immunity to put an end to the pandemic. Herd immunity occurs when a sufficient percentage of a population becomes immune to a disease, making the spread of disease from person to person unlikely. The good news is that SARS-CoV-2 virus has been fairly stable, which increases the viability of a vaccine.
There are broadly four types of vaccine — one, a vaccine based on the whole virus (this could be either inactivated, or an attenuated [weakened] virus vaccine); two, a non-replicating viral vector vaccine that uses a benign virus as vector that carries the antigen of SARS-CoV; three, nucleic-acid vaccines that have genetic material like DNA and RNA of antigens like spike protein given to a person, helping human cells decode genetic material and produce the vaccine; and four, protein subunit vaccine wherein the recombinant proteins of SARS-COV-2 along with an adjuvant (booster) is given as a vaccine.
Vaccine development is a long, complex process. Unlike drugs that are given to people with a diseased, vaccines are given to healthy people and also vulnerable sections such as children, pregnant women and the elderly. So rigorous tests are compulsory. History says that the fastest time it took to develop a vaccine is five years, but it usually takes double or sometimes triple that time.
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.
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.