1. Business
April 20, 2020

India’s IT services sector badly hit by Covid-19 lockdown

By GlobalData Thematic Research

Businesses around the world are scaling back operations due to the Covid-19 outbreak, which is causing trouble for India’s IT services vendors. With India currently under an extended lockdown and the global economy at a standstill, companies including TCS, Infosys, and Wipro will struggle to acquire new projects in the coming months. With revenues certain to take a hit, these firms face a number of pressing issues. To navigate through the current crisis, they must examine their business models and capabilities and ensure they are providing the flexibility that customers need.

The Indian economy is starting to slow down

The spread of Covid-19 in India has been slower compared with Europe and the US, but it has still put the country’s economy at risk. The International Monetary Fund has revised India’s fiscal year 2021 GDP growth projection to 1.9% from its previous forecast of 5.8%. IT stocks have also fallen sharply. Share prices of the four leading IT service firms, including TCS, Infosys, HCL, and Wipro have dropped by an average of 25% since January 2020. At the same time, the Nifty 500 Index has slumped by 26%, which highlights an overall economic slowdown across all industries in India.

Work from home is a concerning factor for IT services vendors

With the world in lockdown and millions of employees working from home, IT firms face substantial challenges. For a significant portion of domestic employees (around 15% to 30% across TCS, Infosys, HCL, and Wipro), working at home is not an option. Projects involving critical institutions such as public services, banks, stock exchanges, and telecom providers need to be managed onsite, which is not possible under the current lockdown. Also, the majority of IT support staff are not equipped to work from home, lacking the equipment (such as laptops), necessary connectivity, and the experience necessary to complete tasks effectively.

Dependency on the US, UK, and Europe will reduce cash flow

The lion’s share of the Indian IT firms’ revenue comes from services provided to enterprises in the US, UK and Europe. Across these markets, major IT projects are being cancelled or put on hold, leaving very little new business for the IT services sector. Existing projects are also being scaled back to the bare minimum.

GlobalData’s IT contracts database, which tracks all publicly announced IT contracts, reveals that the number of IT services contracts signed in February 2020 suffered a monthly decline of 33%. Compared to February 2019, there was an annual decline of 37%. Even in January 2020, the number of IT services contracts was down 15% from the month before.

Consequently, HDFC Securities estimates that India’s IT companies will see revenues fall by up to 7% between Q2 and Q3 2020. The impact of Covid-19 is not confined to the Indian players, but is being felt across the IT services sector. Accenture has already lowered its annual growth forecast to 3% to 6% from pre-pandemic estimates of 6% to 8%.

Consistency in service delivery is paramount

All IT services companies will have a challenging 2020. Nor will 2021 be much better, with limited opportunities for new projects and existing projects being scaled back. While larger firms will take the brunt of the impact, several small firms are at risk of collapse due to their limited client base.

The government has promised to relax lockdown restrictions and allow 50% of employees at IT firms to return to the office from 20 April. The IT firms need to identify failings in their service delivery capabilities and plug the gaps quickly. A focus on collaborative tools, cloud migrations and optimization, and process automation will help them serve clients better. IT firms must innovate to aid clients in areas such as business continuity and disaster recovery, supply chain, and remote working. Use of data analytics to quickly make logistical shifts could be an opportunity for them to demonstrate their ability to help clients in difficult times.