COVID-19 to hurt IT services sector, growth may fall to 3-5% in FY21: ICRA

Indian IT services will face issues such as travel restrictions to developed countries as well as closure of offices/work from home at various offshore development centres as well as onshore, thereby impacting movement of labour.

However, the credit outlook for Indian IT companies remains stable.

Indian IT services industry is expected to see an adverse impact for a short-term due to COVID-19 outbreak with the sector clocking a lower growth of 3-5 per cent in current financial year, according to ratings agency ICRA.
ICRA previously expected the sector to grow at 6-8 per cent. With the slowdown in growth during the first half of 2020-21, the margins will also be negatively impacted before a likely recovery in next the financial year, ICRA said in a statement. However, the credit outlook for Indian IT companies remains stable led by healthy free cash flows cushioning short-term disruptions with significant liquidity in the form of surplus investments generated out of past cash flows, it added.

“The global spread of the coronavirus is resulting in simultaneous supply and demand shocks. We expect these shocks to materially slow down the economic activity,” ICRA Vice President Gaurav Jain said. He cited data from Moody’s Investor Services to say that the US and the Euro zone – which generates more than 80 per cent of IT services export revenues – will see their GDP growth fall from 2.3 per cent and 1.2 per cent in calendar year 2019 (estimate) to 1.5 per cent and 0.7 per cent, respectively, in 2020.

“The (ICRA) forecast assumes gradual recovery during the second half of the year, however, the evolution of virus remains highly uncertain and the full extent of the economic costs remains unclear at this point of time,” he added.
ICRA said on the demand side, developed economies that contribute to majority of the revenues will see delayed off-take of scheduled new projects, reduced discretionary spend as well as overall lower spend owing to sluggish economic growth.

ICRA said the BFSI vertical (which accounts for 30 per cent of the sector’s revenues) is already seeing weakness across the US and Europe and will be further impacted, primarily owing to short-term impact of coronavirus on economic growth, lower credit off-take and other banking services.

Other key sectors such as oil and gas will be impacted because of record-low crude oil prices leading to reduced discretionary spends by such companies, it added. Manufacturing sector – which has been one of the key growth drivers – is also expected to be adversely hit due to overall lower consumption, while travel and hospitality and retail will be impacted as consumers will restrict outdoor activities to essentials in the foreseeable future, ICRA noted.

On the supply side, Indian IT services will face issues such as travel restrictions to developed countries as well as closure of offices/work from home at various offshore development centres as well as onshore, thereby impacting movement of labour.

At the initial stages of projects, movement of labour at client’s site is essential while later the same can be managed remotely, ICRA explained. New projects to be commissioned will be delayed by a minimum of 3-6 months, while projects in the pipeline will also face delays, the agency cautioned.

“The margins for the Indian IT services are already facing challenging operating environment characterised by continued pressure on commoditised IT services, wage inflation, higher onsite costs necessitated by visa curbs as well as lower discretionary spend by corporate,” ICRA said.

It added that it expects large size companies with diversified presence across sectors to manage such headwinds better compared to mid-size companies that have moderately high proportion of revenues coming from a few sectors.

“Nevertheless, the credit profile of Indian IT services companies is expected to remain stable underpinned by its ability to sustain free cash flows despite pressure on short-term revenue growth and margins,” it said.

In a separate report, Sharekhan by BNP Paribas said the January-March quarter is expected to be a weak quarter for Indian IT companies, owing to lower billings from lockdown measures in western countries (including the US and Europe) and India in wake of COVID-19 outbreak.

“Though management of IT companies has restrained to quantify the potential impact of the COVID-19 breakout on the financials, there has definitely been disruption in service delivery and execution due to travel restrictions, client’s confidentiality clauses, and work-from-home (WFH) advisories since mid-March,” it said.

Wipro will announce its Q4 and FY20 results on April 15, while other IT services companies have not disclosed their schedules for their fourth quarter results announcement. Markets regulator Sebi has also given relaxation of 45 days to companies for filing fourth-quarter results and one-month extension to file results for 2019-20.

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