Kotak Institutional Equities (KIE), the research wing of Kotak Mahindra Bank, has placed a ‘cautious’ tag on the information technology (IT) services sector.
Expecting a 1-5% revenue decline period on the financial year of 2021, the broking firm said that its estimates were based on an assumption that the Covid-19 pandemic would lead to a short lived recession, rather than a long drawn one. Kotak expects an economic revival in the second half of the calendar year.
“We forecast sequential revenue decline for June and September quarters, a strong period for the industry. We expect some level of catch up on spending and sequential growth towards second half of FY21,” the report said.
During the quarter ending June 2019, the Indian IT sector reported a revenue growth of 1.6% for quarter-on-quarter and 8.5% growth year-on-year, with digital revenues growing by 6% sequentially.
Among Indian IT services majors, Tata Consultancy Services (TCS) and Infosys, are more likely to deal with the mini recession with relative ease, given their large client base and transformational capabilities.
Other firms such as Wipro, HCL and Tech Mahindra have challenging times ahead.
“Wipro’s model is marred by execution challenges (sales as well as delivery) and questionable strategic choices. HCL Technologies is modest in applications and weak in BPO. Tech Mahindra is a tier 1 player in telecom but a middling in the enterprise Nonetheless all these companies have a robust client base, excellent competencies and can grow consistently with right strategic choices and execution,” the report said.
The countrywide lockdown has resulted in IT services firms scrambling to maintain business continuity.
Central as well as state governments have included IT and business process outsourcing (BPO) companies as part of essential services, meaning critical services can be delivered on-site
Companies have ramped up work from home (WFH) for over 50% of the headcount in India but face three key challenges; logistics, infrastructure and client permission.
On the logistics side, several IT services companies have not been able to procure laptops for all their employees.
In terms of infrastructure, lack of reliable high-speed internet are expected to affect business delivery.
“Non-voice BPO can be managed from home for non-critical processes. Many capital market and banking processes cannot be managed through WFH model,” Kotak said.
Lastly, client permission to enable work from home is mandatory in India. This is posing a problem for IT companies as many financial services clients have a strict confidentiality clause. IT companies are in the process of securing permissions from clients to relax rules of working from offshore data centers while protecting data confidentiality in the process.