05 May 2020 22:33 IST

IT sector staring down the barrel of uncertainty

How many companies can weather the pandemic storm?

The Indian IT services sector was expected to be a defensive bet in the face of the economic impact of the Covid 19 pandemic. But if one looks at the quarterly results for the quarter ended March 31, 2020, and the management commentary accompanying them, it is becoming clear that there might be a few chinks in the armour of IT companies too.

Many IT companies have discontinued the practice of giving revenue and/or margin guidance. This shows that in a world economy marred by the pandemic, managements are not sure of their revenue visibility in the future. This is despite some companies bagging large deals in the quarter ending March 31, 2020.

When these deals will be operationalised is difficult to predict at this juncture. This uncertainty in demand for services makes it difficult for these companies to give revenue or margin guidance.

Also, most companies have shelved new hiring, except for campus hires, and have suspended salary hikes. That gives a picture of the uncertainty in the upcoming months.

Spike in costs

Wipro, first off the block with its results, saw its net profit fall 5 per cent to ₹2,345 crore in the March 2020 quarter compared to the previous quarter. Employee and facility-related costs spiked during the March quarter by around 4 per cent each. This impacted its margins which shrank to 17.6 per cent (versus 18.4 per cent in the previous quarter).

Tech Mahindra had a similar spike in costs which saw its net profit for the March quarter fall by 30 per cent sequentially. There was a one-time goodwill impairment that brought down profits, but the management also said that despite its best efforts, it struggled to contain costs. This can be seen in the near 20 per cent rise in other expenses, while there was a 19 per cent fall in sub-contracting costs.

Infosys too saw a rise in costs that led to its margins coming in at the lower end of its guided range at 21.1 per cent. The main reason for increase in Infosys’ costs was a 32 per cent rise in other expenses and also a 16 per cent rise in cost of software packages.

Only TCS managed to control its costs during the quarter as its margins were flat at 25.1 per cent during the March 2020 quarter. The company’s other expenses during the quarter fell by 60 bps (basis points) and allowed it to maintain stable margins.

US & Europe revenues fall

Revenues from the US were down for Tech Mahindra, Wipro and Infosys. This region contributes nearly two-thirds of the revenues of most IT services companies in India.

TCS does not give the break-up of its revenue in terms of geographies or industries, but it too saw a sequential fall in overall revenues during the quarter. The main reason for the fall in revenue for TCS was the disruption caused due to the lockdown imposed as a result of the pandemic.

European revenues fell for Tech Mahindra and Infosys, while Wipro managed only a marginal rise in revenues from Europe. This is indicative of the revenue pain being broad-based, across regions.

Revenues from banking, financial services and insurance, which is a big revenue earner for most IT services companies, took a hit during the March quarter. Only Tech Mahindra saw its BFSI revenues rise (up 11 per cent QoQ). But BFSI makes up just 15.3 per cent of its revenues, so its performance could not cushion the overall hit to the company’s revenue. Tech Mahindra’s mainstay — the communications vertical saw revenues fall by nearly 8.4 per cent.

How long this lack of revenue visibility will last is anyone’s guess. The TCS management offered some insight by sharing its internal model for revenue growth. This is despite the company’s practice of not sharing any guidance. TCS said that it expects to return to the same level of revenue in the second half of 2020-21 as it reported in 2019-20.

This means, after the hit to revenue it takes in the first half of 2020-21, revenues for the second half will be at the same level as 2019-20. In essence, TCS’s management says according to its model, it expects to report flat year-on-year revenue growth in the second half of 2020-21. If the whole industry sees a similar bounce back, it would really be the defensive ones that can weather the pandemic storm.