IT stocks are up against weak global spending in 2020

Indian IT companies like TCS, Infosys, Wipro and HCL Tech still depend predominantly on US tech spending to drive incremental growth.

May 20, 2020 11:05 IST India Infoline News Service

The day after Jerome Powell announced that the US recession could be much worse than anticipated; the one Indian sector to take the deepest cuts was the IT sector. Most of the frontline IT stocks lost anywhere between 4-5% in a single day. The reasons were not far to seek. In an economic slowdown, IT spending would be the first casualty. Indian IT companies like TCS, Infosys, Wipro and HCL Tech still depend predominantly on US tech spending to drive incremental growth. Of course, UK and EU are becoming important markets but their macroeconomic situation is no better that the US. Check the IT index over last one year.
Data Source: NSE
The correction post Jan-20 was extremely sharp. However, the bounce in the IT sector post the lows of late March has not been too convincing. Despite a sharp bounce in the Nifty index and the support of a weak rupee, Indian IT stocks have struggled to pick up from lower levels. There are concerns on the top line and the bottom line. The surest indication of this ambiguity was when most IT companies refused to give financial guidance while announcing the fourth quarter results for March-20.

How IT spending is expected to shrink in the year ahead
IT spending globally was around $3.75 trillion in calendar year 2019. The most conservative estimates peg the tech spending in 2020 to be at least 8% lower. That is a good $300 billion worth of business lost and most of the losses are likely to come in the BFSI, hydrocarbons, telecom and digital verticals; where Indian IT companies have held a position of dominance. The chart below lays out the estimates of IT spending for 2020 based on individual verticals as estimated by Gartner Research.
Data Source: Gartner Research
As can be seen from the above chart, the global IT spending is likely to contract by 8% from $3.75 trillion to around $3.40 trillion. That is a clear loss of $300 billion of business. If the lockdown continues the actual losses in 2020 could be much wider. That is because the pandemic is impelling CIOs to prioritise spending on technology and services and largely focus on projects that are deemed “mission-critical”. According to the Gartner report, the message from the boards appears to be “Growth and Transformation can wait”. 

Many industries have been hit badly by the pandemic. For example, recovery in IT spending is likely to be extremely slow in sectors like entertainment, logistics, air transport and heavy industry in 2020. BFSI will focus more on survival and insurance companies will have a major challenge in meeting COVID-19 claims. In addition, telecom sector already has an overhang of investments and oil companies are reeling under weak Brent Crude prices. In these instances, the problems are structural and go much beyond a simple cyclical recovery. While the top line of IT spending is expected to be hit due to shifting priorities, the bottom line is likely to be impacted more sharply due to payment delays and lower margins. As most Indian companies concede privately, that trend has already begun.

Indian IT companies are dropping prices to retain clients
India’s marquee IT companies counts most of the Wall Street banks among their chief clients. Even after the Indian IT industry has touched a size of $200 billion, nearly 45% of the total revenues still come from the BFSI space. These large Wall Street banks are widely expected to reduce overall budgets and discretionary tech spending, which includes areas such as technology consulting services, business analytics, research & design and process management projects. The top 10 American banks collectively spend $70 billion on technology each year. That had been the low hanging fruit for Indian IT players and that could really take a hit in the coming year. But Indian IT companies are being proactive too.

In fact, most of the IT majors are currently reaching out to clients with sweeteners. They are offering payment deferrals, discounts of up to 20% as well as other sweeteners to US banks just to keep their business. The aim is to at least keep the relationships with the banks going so they can be expanded after the dust of the COVID-19 pandemic settles. Most of the IT maintenance contracts stretch over longer time frames and that would mean the impact of lower prices will linger much longer.

The good news for Indian IT companies is that BFSI players are not slashing IT budgets as aggressively as sectors such as travel, hospitality and retail. In fact, many of them are even investing in technology to focus more on automation and create seamless work-from-home (WHF) ecosystems. That could be the good news for Indian IT companies in an otherwise bleak IT spending scenario.

Related Story

Open Free Demat Account (Rs699)