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COVID-19 impact: Is the IT/ITeS industry bracing for negative growth in FY21?

Pareekh Jain, founder, Pareekh consulting, said that globally IT firms may see a 5 to 10 percent decline and it is bound to impact Indian IT service providers.

June 03, 2020 / 07:22 PM IST
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The global IT/ITeS sector is starring at negative growth of 5 to 10 percent in FY21, probably for the first time, due to the impact of the COVID-19 outbreak. This will in turn hurt Indian IT/ITeS industry as well, according to analysts.

V Balakrishnan, former CFO, Infosys, said: "In all probability, IT industry may end up with a negative growth for FY21."

Chirajeet Sengupta, Partner, Everest Group, a consulting firm, said: "Our base case estimates point to a negative growth of 5 percent for calendar year FY21 globally. These are unprecedented times and a crisis of the nature and  magnitude of COVID-19 has never been witnessed by the industry."

Pareekh Jain, founder, Pareekh consulting, said that globally IT firms may see a 5 to 10 percent decline and it is bound to impact Indian IT service providers.

According to a NASSCOM estimate, Indian IT/ITeS industry revenue would be $191 billion for FY20, growing at 7.7 percent.

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How will it impact Indian IT firms?

Balakrishnan explained that some of the clients are filing for bankruptcy in the US due to the virus outbreak. This includes retail firms, whose businesses were adversely impacted due to COVID-19.

In addition, major economies such as the US and UK are looking at negative growth. For Indian IT firms, these markets account majority of the income.

Take for instance the recent regulatory filings of two major IT firms. Both Infosys and Wipro in their US Securities and Exchanges and Commission filings said that COVID-19 will impact its growth and profitability as they see project terminations, deferrals, bankruptcy filings and pricing pressure from clients.

Also Read | COVID-19 likely to hit Infosys’ growth numbers in FY21

In addition with their major markets bracing for a slowdown, it will also impact their margins, the statements added. The US, UK and European Union account for more than 70 percent of Indian IT firms’ revenue.

Jain explained that if the global market is seeing a growth decline of about 5-10 percent, Indian IT will see -5 to 0 percent growth. “While bigger firms might grow, smaller firms will be impacted,” he added.

Silver lining

But there is a silver lining, especially for big IT firms.

For one, their portfolio is balanced unlike the smaller firms. If banking, retail and energy verticals are down, other verticals such as telecom and healthcare growing. Another reason as to why they could fare better is that they have zero debt and cash reserves to tide over the crisis.

For instance, cash reserves of top IT firms TCS, Infosys and Wipro stand at $5.9 billion, $3.6 billion and $3.53 billion at the end of March 31, 2020, respectively. These firms could afford to go for acquisitions and that could be the key growth factor during COVID-19.

Jain explained that with vendor consolidation, bigger firms could increase their market share as clients are looking to have fewer partners.

Impact on employees

However, layoffs, analysts added, will be inevitable as it is evident in the recent terminations the industry has witnessed. Small firms have started termination of employees as their growth came under pressure.

ITeS firm Fareportal laid off over 300 employees as most of its clients, primarily in travel and aviation space, had suffered. Recently, French BPO firm Teleperformance terminated 3000 Indian employees as many of its clients’ discontinued their services.

This trend is likely to continue as the pandemic continues to impact enterprises across the world.

Suspension of wage hikes and variable payouts could be on cards and that would be a saving too. Balakrishnan explained that variable pay accounts for about 30 percent of employee’s pay. Doing away with them for all employees could save 4 percent of the overall revenue, he added.

Swathi Moorthy
first published: Jun 3, 2020 07:22 pm