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COVID-19 impact | How much are IT firms gaining from growing tech adoption?

IT services spending by 6-8 percent between 2021 and 2024 from 4-5 percent now at the back of COVID-19.

August 30, 2020 / 11:51 AM IST

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Digital economy in the US is set to grow to 10 percent of the US' GDP over the next decade. This would create an opportunity of $1.3-5 trillion opportunity annually for Indian IT firms, according to a recent report.

The report by brokerage firm Motilal Oswal, based on interaction with C Vijayakumar, CEO, HCL Tech, stated that this would be driven by automation, cloud, digital transformation and consumer experience.

By now, it is more or less obvious that is where the growth for the IT sector lies. Also, these are the buzzwords you hear from the leadership during press conferences and webinars, where they talk about how COVID-19 has made tech acceleration faster.

But, is it really resulting in huge opportunities for IT firms? Yes and no.

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Major brokerage firms released an IT sector report recently on how the road looks for these companies. Broader outlook was the IT firms would gain from the pandemic. HDFC institutional securities report said that not just tier 1 but mid-tier IT service companies are benefiting as well. Mid-tier companies, the report said, would outperform tier I companies by 300 basis points between FY2020 and FY2023.

Kotak Institutional Securities Equities (KSIE) in its report said that TCS and Infosys will be front runners when it comes to winning transformation deals even as other companies benefit. Investments by their clients, across sectors from retail to healthcare, in technology will result in corresponding opportunities for IT services companies, the report said. This is expected to increase IT services spending by 6-8 percent between 2021 and 2024 from 4-5 percent now.

First driver of growth cloud. Motilal Oswal report said that the cloud consulting and managed services are expected to reach $240 billion from current $60 billion currently over the next three to four years.

The next area is customer experience. Online penetration in some of the countries have been pulled forward at least 5-10 years resulting in the demand for IT service providers to enable interactive and analytics capability, the KSIE report said.

Other sectors include automation, contact less services and telehealth.

Going by these reports, IT firms are best positioned to reap the benefit of COVID-19. However they have not been able to completely translate the technology spending to their revenue.

Let us take cloud adoption. KSIE report said that while the cloud hyperscalers such as Amazon Web Services, Microsoft Azure and Google Cloud are seeing accelerated spending, the same growth cannot be linked to IT services. “The surge post Covid can create new opportunities though not of the scale witnessed with cloud hyperscalers,” the statement added.

Top five banks’ technology investment increased by 7 percent for the quarter ending June 2020 compared to 5 percent in the previous quarter in March 2020. However for the majority of IT firms, their revenue came down. IT firms like TCS, Wipro and Cognizant saw a BFSI revenue decline by 4.9 percent, 6.9 percent and 4.3 percent, respectively.

According to analysts, it was because clients are partnering with cloud hyperscalers and Software-as-a-Service firms directly.

So where does that leave IT firms? Going by reports and leadership commentary, all these will definitely benefit IT services companies. The sector is poised to grow as well, albeit a little slower than cloud and SaaS companies, added experts.

But the question is, will we see IT companies emerge as more than services companies in the post pandemic world. If they want to, there is no better time than now.
Swathi Moorthy
first published: Aug 30, 2020 10:30 am

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