The second US fiscal stimulus package is yet to see the light of day and this may be a cause for worry for Indian IT majors, especially those with exposure to consumer-facing segments.
However, most of them are hoping that the rebound seen in the second quarter will continue in the coming months, with or without the fiscal stimulus. According to IT executives, this is because long-term technology transformation investments will continue as clients prepare for the future.
How will a stimulus aid IT firms?
When the pandemic hit, fiscal stimulus programmes announced by governments led to positive sentiments among clients, especially customer facing ones such as banks. Stimulus packages were announced in March and April by many countries including the US and European Union.
Bengaluru-based IT major Wipro, in its earnings call in April, said: “…(thanks to) the quick response of various governments on the fiscal stimulus, there is also a positive impact on the banking industry, where they will see more activity.”
The company added that organisations are taking advantage of fiscal stimulus packages to launch products, which is resulting in opportunities. During the company’s Q1 earnings call, Salil Parekh, CEO of Infosys, pointed out that it took the stimulus into account in its revenue guidance.
During the earnings call on October 14, Parekh added: “We see strength in the US economy at this stage… from what we have seen so far from both in Europe and the US, where the economies have been supportive… that is definitely positive for what we see in our business.”
The idea is that putting money in the hands of people will drive consumption and, in turn, boost the economy. Customer-facing companies such as banks and retail businesses would benefit from this directly.
So, to some extent the stimulus check offered by governments helped keep the impact of Covid-19 in check. This is especially important in the US, which contributes to over 50 percent of Indian IT companies’ revenue.
A second stimulus will thus add to the momentum.
Second stimulus package status
However, the second stimulus package is yet to be announced. In early October, President Donald Trump called off stimulus discussions until after the elections on November 3.
While executives expect a stimulus to be announced later, some say that the absence of one will impact sectors such as banks and retail.
Banking and financial services account for about 20-30 percent of business for major IT firms. Retail exposure could vary between 10-15 percent for IT firms and could be even lower for others.
R Srikrishna, CEO, Hexaware Technologies, said that the lack of stimulus packages will impact businesses, especially B2C businesses, if consumers do not have money in their pockets. “It will impact banks, and it could impact capital markets and stock markets,” he said.
It will have a short-term impact as companies would want to meet their financial objectives for the quarter. “That is going to be the number one issue. If there is no second stimulus it is going to have a negative impact in the short term…,” he added.
According to Srikrishna the recovery the company saw from Q2 to Q3 in its consumer vertical is likely to slow down without the stimulus. Hexaware, which is delisting its shares effective November 9, follows the calendar year for its fiscal year.
However he is confident about the client’s long term investments, which, in turn, will drive growth.
Why are IT firms confident?
There are several reasons for this. As Ashok Soota, founder, Happiest Minds Technologies, pointed out, the IT sector has always been the first to bounce back after a crisis as the adoption of tech increases.
According to IT executives, the aftermath of the crisis caused by Covid-19 will be no exception.
Speaking to Moneycontrol Manoj Bhat, CFO, Tech Mahindra, said: “On one end there is a huge push towards digital transformation and at the other end, companies are looking at how they optimise. Both are happening at the same time.”
“So, I think while obviously residual risk will remain (from Covid), I don’t think it is determined by the absence or presence of a stimulus,” he added.
During the earnings call on October 14, Infy’s Parekh said: “…we see the huge strength in technology, which is a very large mega trend worldwide that is driving some … changes.”
Technology, these executives pointed out, is going to be a key driver of growth. IT firms continue to see investments in areas such as cloud migration, automation and other digital areas such as cybersecurity.