Analyst Corner: IT services and consulting firms face COVID-19 impact

By: |
March 14, 2020 8:28 AM

With Covid-19 situation escalating, Indian IT services cos could be impacted in multiple ways in the near-term, cuts in client spend, travel restrictions, closures of offices, INR depreciation.

news coronavirus covid 19 latest updates in hindi first death in Karnataka- india due to covid 19The top 5 IT services stocks have corrected 21-23% from recent peaks, largely in line with the Nifty, itself down 22% from recent peak. (Reuters)

With Covid-19 situation escalating in US & Europe over last 10 days, Indian IT services cos could be impacted in multiple ways in the near-term, cuts in client spend, travel restrictions, closures of offices, INR depreciation.

Covid-19 can impact Indian IT cos in multiple ways. Demand impact: global economic slowdown particularly one which impacts US & Europe would impact growth of IT cos from a demand perspective; demand from specific verticals such as oil & gas & travel could be impacted more, travel restrictions could lead to delays both in terms of new deal signings/closures and execution of projects, impacting both growth & margins, escalation of Covid-19 situation in India could lead to closure of offices, which would impact productivity & project execution, impacting both growth & margins, global risk-off could lead to INR depreciation which would be a positive for Indian IT cos.

The top 5 IT services stocks have corrected 21-23% from recent peaks, largely in line with the Nifty, itself down 22% from recent peak. Assuming a return to last 5 year median valuation, the stocks are now pricing in 9-15% lower FY21E EPS vs. our base case estimates. This implies either marginal growth relative to FY20E EPS of 3-5% for Tech Mahindra & TCS or decline of 5-11% for Wipro, Infosys & HCL Tech.

We expect IT services cos to moderate FY21E growth expectations during their 4Q results either in explicit guidance or in commentary. Growth guidance from Accenture when it reports 2Q2020 results on March 19 will be key to watch out for. Post the recent correction, Infosys looks most attractively valued among top tier IT cos as it is pricing in relatively low expectations and is our top pick. We also believe Covid-19 related stock correction provides good entry opportunities for long-term investors into TCS and as we prefer quality in the current uncertain environment.

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