Q4 results and COVID-19: How did IT firms fare in the 2008 crisis and will it repeat in 2020?

Indian IT industry is all set to announce their results for the January-to-March quarter starting April 15. Their forecasts tepid and barely any demand. For many, it echoes of 2008 economic crisis where the IT outsourcing business went through a similar slump.

V Balakrishnan, former Infosys CFO, in an earlier interaction explained that the during the 2008 crisis the industry went through a major slump and it took close to two years to recover.

The recession, which started with the downfall of Lehman Brothers on September 15, 2008, hit the banking and financial services (BFS) the hardest. BFS was and is one of the biggest revenue generator verticals for IT firms.

Overall revenue declined in dollars terms as client business dropped, especially in the US. It could not be helped, for the US was and is by far the biggest market, accounting for about 60 percent of overall revenue.

How the major IT firms performed during the crisis? If you look at IT firms, most reported a revenue decline during FY09 and FY10. Leadership across the firms highlighted the ongoing crisis and the impact it would have on the company. Firms scaled back revenue guidance, put a stop to expansion plans and slashed recruitment plans.

Infosys in its FY09 annual report warned investors of deceleration in its business. In its FY10 report, it reported a decline in annual revenue and profit in dollars terms as its clients cut back on spending on the back of the economic crisis. The company grew just 3 percent in FY10 as opposed to the 11.7 percent growth it saw in FY09. In FY08, the company’s growth was 35 percent year-on-year and it reported $1 billion in profits.

In case of Wipro, Azim Premji said in its 2008 annual report that the company’s combined IT business grew 43 percent to $4.3 billion. As the client’s budget began to freeze, its FY09 and FY10 revenue grew only 0.5 percent and 1.5 percent to $4323 million and $4390 million, respectively.

TCS grew 22 percent to $5700 million in FY08. In FY10 the company’s growth slowed down to 8 percent at $6340 million. HCL Technologies’ FY08 revenue grew 35 percent to $1878 million. It grew its profit and revenue 17 percent and 24.1 percent in FY09 to $2,180 million and $2705 million, respectively.

Layoffs, hiring Most IT majors honoured the placement offers they made, though some of them deferred on-boarding by as long as a year. According to a Mint report,  Satyam Computer Services was then looking to layoff close to 4,000 of its 50,000 workforce.

Promotions were deferred and hikes came down with no salary change for the executives in few firms, the report added.

Will 2020 be a repeat of 2008? Yes and no. Like in 2008, demand has slumped. Customers are cutting down their IT budgets and layoffs have begun like then. Various brokerage firms estimate the short to medium term impact to last for the next couple of quarters, after which the demand is likely to revive.

Analysts agree and say that enterprises are lot more optimistic and are in discussions with service providers on the way forward. “There are discussions happening over contracts. Customers want discounts and concessions for existing contracts and want to know what kind of correction they can achieve for 2020,” an analyst said.

“So I don’t see a ripple impact in the next few quarters and definitely not a disaster,” he added.

However Balakrishnan reasoned that 2020 COVID-19 crisis could be worse, unlike the financial crisis since there is hardly any headroom for growth.

The current slowdown that is affecting the IT firms is not helping either. NASSCOM estimates the industry growth to be at 7.7 percent for FY20.

None of the developed economies are doing well from US to Japan. All the sectors are going through a slump unlike 2008, where firms were able to offset the growth by expanding to other verticals like energy.

“There are more headwinds than tailwinds,” said Balakrishnan.