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Last Updated : Mar 24, 2020 09:39 AM IST | Source: Moneycontrol.com

The COVID-19 impact: Is it going to be a GFC redux for India's IT sector?

In sync with the broader market, Indian IT Services stocks have corrected sharply in the last month due to the potential impact on global growth stemming from the Covid-19 pandemic.

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Representative Image

The outbreak of COVID-19 will have a significant impact on the Indian IT sector which is staring at the tough times similar to the 2008 global financial crisis (GFC), said experts.

In sync with the broader market, Indian IT Services stocks have corrected sharply in the last month due to the potential impact on global growth stemming from the pandemic.

"The current scenario is very challenging and constantly changing. It is very hard to predict the effect on IT budgets when the scenario keeps changing every week. It is clear that FY21 will be a challenging year for Indian IT as budgets across sectors will get cut and/or deferred," said Harit Shah, Senior Research Analyst, IndiaNivesh.

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"Relative stock preferences are Infosys and HCL Technologies, although, given the poor market conditions, we cannot rule out further stock declines till globally COVID-19cases start to stabilise or decline," Shah said.

A GFC redux for the sector?

The COVID-19 impact on the sector is getting wider, deeper and longer. Even though, it has yet not touched the levels of 2008, the current scenario signals that the sector may witness what it had during 2008-09.

As per brokerage firm Emkay Global, the GFC during late CY08-early CY09 was a temporary shock to the markets. However, it had driven investor concerns around the business viability of Indian IT given that some of the large clients were going down (e.g., Lehman, Merrill Lynch) and thus had led to a sharp valuation correction.

The COVID-19 led hit seems to be a much broader to several client industries and verticals, Emkay Global highlighted.

"We analyse if it is going to be a redux of the 2008 GFC for Indian IT where the sector saw significant revenue drops in H2FY09 and significant valuation erosion (Tier I Indian techs went down to 5 times-10 times 1-year forward P/E and 0.6 times- 2.2 times 1-yr forward EV/Sales)," said Emkay Global.

"During the GFC, Indian Tier-I techs had seen sharp sequential revenue declines in H2FY09 before seeing some stability from the June’09 quarter. Tier-II techs saw much more prolonged revenue/margin hits. Taking this into account, we moderate our FY21 growth assumptions by building in a weak H1FY21, but note that it is currently difficult to assess the extent of damage due to the fast-evolving situation," Emkay said.

Brokerage firm Dolat Capital agrees that the COVID-19 outbreak has exposed the sector to challenges from many fronts.

"The COVID-19 has certainly impacted the business of Fortune Clients for Indian IT vendors and thus would have a pass-on impact in many cases into pricing pressure, cut in discretionary spends or at-least slower start in deal ramp-up," said brokerage firm Dolat Capital in a report.

IT major Accenture curtailed its annual revenue and earnings guidance range by 3 percent and 2 percent, respectively, citing the challenges around COVID-19.

As per Dolat Capital, it expects its third-quarter to get impacted as clients are going through the uncertainty period but expect the growth rate to improve Q4 onwards as by that time it expects clients to adopt to New Normal and expect them to continue on their IT spends plans.

"We believe a similar trend is expected to be witnessed by large Indian vendors as well," Dolat Capital said.

Brokerage firm HDFC Securities has cut EPS estimates by nearly 7 percent and revenue estimates by 2-7 percent.

It has cut the target price of some stocks by nearly 17 percent, factoring delay in pipeline conversion and core business volume and pricing impacting Q1/Q2FY21.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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First Published on Mar 24, 2020 09:39 am
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