Technology is driving how the world operates amid the pandemic, but that isn’t translating into increased revenues for information technology (IT) and related companies.
India’s IT service companies, which have been a bedrock of the economy, are likely to lose business in the coming months as a coronavirus-induced economic slowdown around the world hurts their clients’ revenues.
The industry, which includes outsourcers and companies that manage IT infrastructure, derives nearly 80 percent of its revenues from clients outside India, mainly in the U.S. and United Kingdom, which have been hit badly by COVID-19.
How Severe Will the Impact Be?
It is unclear how much worse the economy will get, making it hard for analysts and companies to predict the pandemic’s impact on the IT industry. But many analysts believe it could be worse than the Great Recession.
Revenues for IT companies listed on Indian stock exchanges could fall by 5 percent to 7 percent this financial year, estimated Girish Pai, head of research at Nirmal Bang Institutional Equities, a stock brokerage firm in Mumbai. That would be the first decline in the industry’s history, Pai said.
Another estimate by credit rating agency ICRA is less dire: It expects the industry to grow by 3 percent to 5 percent, versus an earlier target of 6 percent to 8 percent growth. In either case, the near-term outlook is uncertain.
“This is the most difficult phase for the industry,” said Mrinal Rai, Bengaluru-based principal analyst at ISG, a technology research and advisory firm.
Some major IT companies, such as Infosys and Wipro, which recently reported earnings for the financial year that ended March 31, declined to give any growth guidance for the year, contrary to usual practice.
Jobs Are at Risk
The upshot of the industry’s slowdown is that hundreds of thousands of jobs are at risk. The IT services and outsourcing industry employs around 4.4 million workers and created an estimated 200,000 new jobs in the last financial year, according to the National Association of Software and Services Companies (NASSCOM), a trade group.
So far, many companies have said they will retain their employees and honor outstanding job offers. However, if revenues remain depressed, layoffs could become inevitable. This would be especially true for small to midsize companies that rely on a handful of clients.
“This is a people-intensive sector,” NASSCOM president Debjani Ghosh wrote recently in an opinion piece, “and if business shrinks for companies … there will be repercussions for the employee workforce also.”
Decline in Spending
Pain for IT and outsourcing companies stems from a decline in spending on IT projects by companies in the U.S. and elsewhere, especially in such sectors as travel and tourism, hospitality, and aviation, which have lost 80 percent to 90 percent of their revenues. Less-troubled sectors, such as banks and financial services firms, are in cash-conservation mode and looking to delay new IT projects.
“We are also receiving client requests for price reductions, discounts and extended payment terms,” reported WNS, an outsourcing company based in Mumbai, in its recent earnings release. The company said its revenues are under pressure due to delays in new business and government lockdowns, which have impacted service delivery. WNS declined to provide annual guidance for this year but said its revenues for the quarter, April to June, could decline by 15 percent compared to the same period last year.
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IT services and outsourcing companies in India struggled to shift their workforce to a remote-work setting following the nationwide lockdown. Companies scrambled to provide computers to hundreds of thousands of employees; overcome low Internet bandwidth; and get permission from clients to allow working from home, which was earlier barred due to security concerns.
After initial hiccups, analysts say these companies have been able to transition more than 70 percent of their staffs to working from home.
‘Captive Centers’ Struggle
One segment of the IT industry that has struggled are “captive centers” of global companies. These centers perform certain functions for the parent company, including data analytics, IT management, and research and development. Walmart Labs and U.S. retailers Target and Lowe’s are among those that have such centers based in India, to save costs and benefit from the local talent pool.
India hosts 1,400 captive centers, compared to 700 in the Philippines and 450 in China, according to a report by ISG. Around 40 percent of these employ fewer than 500 people. These smaller centers have struggled amid India’s lockdown, which prompted industry analysts to say that some of them may eventually be sold off or shut down.
“In the future, whenever these things settle, having captive centers offshore may not be a good approach,” said Rai of ISG.
On a positive note, the pandemic is expected to push more organizations worldwide to undergo digital transformations, which include shifting to digital technologies to manage many business functions, including business processes and customer engagement. Many Indian IT companies already offer these services.
“We see long-term opportunity as the focus on digital and core transformation gets accelerated,” said Pravin Rao, chief operating officer at Infosys, in a recent earnings call.
Companies may fund these transformations by cutting back on IT expenditures elsewhere, so it may not add to overall revenues for IT companies. But over the long run, transformation could be the big driver of the industry’s growth.
“We are quite confident that the industry will show its resiliency,” Rai said.
Shefali Anand is a New Delhi-based journalist and former correspondent for The Wall Street Journal. You can follow her on Twitter.