Coronavirus to infect Infosys, TCS, Wipro financial statements; IT sector growth outlook dim

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Published: April 8, 2020 6:01:24 PM

With the results season just around the corner, investors have their eyes set on what comments flow out on the novel coronavirus and its impact on revenue, growth and future outlook of corporate India.

setback for Indian economy! COVID-19 pandemic pulls India's service sector activity into contraction modeThe headwinds that the IT sector is facing owing to the coronavirus pandemic are likely to dampen the growth prospects of the sector in the near-term.

With the results season just around the corner, investors have their eyes set on what comments flow out on the novel coronavirus and its impact on revenue, growth and future outlook of corporate India. Although it still remains to be seen how various sectors are hit, there is a consensus among three big brokerage and equity research firms, that the impact of the coronavirus will start to show on profit & loss statements of information technology companies including Infosys and TCS. While ICICI Securities has predicted a revenue growth between 0% – 1% in the fourth quarter; HDFC Securities has estimated the IT sector’s revenue growth at somewhere near (-)3% – 2.9%. On the other hand Motilal Oswal expects tier-1 IT firms to post revenue growth between (-)0.52% – 1.3%.

The headwinds that the IT sector is facing owing to the coronavirus pandemic are likely to dampen the growth prospects of the sector in the near-term. With a global lockdown taking a toll on business and travel, new client wins for IT firms seem to be a growing concern along with delayed client decision making. “The impact of economic dislocation accentuating in March has led to major supply-side transition for the sector impacting billings. The demand-side factors and the second-order impact (disruptions in clients) will lead to a bigger dent in the ensuing quarter,” analysts at HDFC Securities said in a research note. The brokerage firm has trimmed earnings per share estimates by 9% for tier-1 and 15% for tier-2 IT firms. 

ICICI Securities think that profit will have to take a back seat for IT firms in the first half of the fiscal while predicting profit after tax (PAT) will fall across the board in the March quarter of the previous fiscal. Among large cap IT firms, ICICI Securities and Motilal Oswal are expecting Tech Mahindra to register a degrowth in PAT. While ICICI Securities is predicting the slump in PAT to be 9.2% on-quarter basis, Motilal Oswal thinks the fall will be near 25%.The earnings before interests and taxes, as predicted by Motilal Oswal, are likely to fall across the board for large-cap IT firms like: TCS, Infosys, Wipro, HCLT and Tech Mahindra. 

As uncertainty keeps brewing around coronavirus and its long-term impact on how businesses chart their growth path, IT sector’s growth for the current fiscal year is likely to be shadowed by the same. With core operating geographies like the USA and Europe turning out to be the new hotspot for the virus, it is possible that IT majors will have to explore other avenues of business. “Given the continuously evolving nature of COVID-19, demand, supply, pricing and receivable uncertainties should remain in the near term,” said Motilal Oswal. Although most of the IT sector firms asked employees to work from home, Motilal Oswal said that not all services are amenable to be delivered from home.

While ICICI Securities said that the decline in revenue in the current fiscal is expected, it is the commentary on time of recovery in business and long term implications from the consequences of the coronavirus pandemic that would be key to watch.  With no specific timeline on when normalcy will return in the post pandemic world, Motilal Oswal said that deal signing during 4Q of FY20 will likely be a key area of investor focus as it is the latest available proxy for demand. 

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