One of the few sectors that didn’t face the wrath of COVID apart from Pharma and Logistics is the IT Sector. Since the IT sector has the advantage of remote work policy, increase digital footprint in the market and e-commerce flourishing the IT sector has outperformed expectations. Let’s have a detailed analysis of the impact of COVID-19 on the IT sector and the opportunities that lie ahead.

How did the IT Sector manage to get back on its feet?

The Government announced a nationwide lockdown on 25th March 2020 across all states in India. The lockdown came as a sudden blow. Since it left many across the nation unemployed, stranded or despaired. The supply chain became dysfunctional. The Law Enforcement across the nation was a hotchpotch. Cash Flows became disrupted as companies across the world defaulted on payments, especially to IT companies where foreign companies outsourced their work to in India. However, this blow was temporary because of the suddenness and uncertainty of COVID.

The IT sector did not take much time to get back on its feet, as the rules for lockdown became more defined, the necessity for eCommerce increased and work-from-home became the norm. Likewise, Meetings and Online classes happened on platforms like Google Meet and Zoom. Moreover, Business communication platforms like Slack gained momentum as well.

Infosys announced in its 39th Annual General Meeting that it was considering a hybrid work-from-home model in the future. Wherein a part of its employees would be working from home permanently and the rest from office.

Colleges and Academic Institutions started investing in online platforms to conduct classes as universities and schools across the globe remained closed. As internet traffic started to increase companies found it necessary to expand their virtual presence. Companies of all sectors all across the world had just one saviour keeping things going , that was the IT sector. Companies started investing in IT Infrastructure to accommodate their increasing online traffic.

How has the IT performed in Q1?

Info Edge (India) Ltd.NIIT Technologies Ltd.MindTree Ltd.TECH MWipro Ltd.
Net Profit QoQ Growth %199.39%-3.35%3.30%-34.71% 2.75%
Net Profit
Quarterly YoY
Growth%
(Between Q1FY20 and Q1FY21)
8.7%13.01%129.77% -37.7% 0.19%

Source:TrendLyne
HCL Technologies Ltd.Infosys Ltd.Larsen & Toubro Info..TCSMphasiS Ltd.
Net Profit QoQ Growth %-7.47%-1.45%-2.60%-12.90% 20.31%
Net Profit
Quarterly YoY
Growth%
(Between Q1FY20 and Q1FY21)
31.61%12.36% 17.06%-13.54% 32.72%
Source:TrendLyne

As expected most players in the IT have declared a decreased quarterly revenue growth(QoQ) and decreased quarterly profit growth(QoQ). This, however, shouldn’t be misinterpreted as the performance for NIFTY YoY is marginally high. Many Force Majeure clauses were triggered which affected the cash flows and balance sheet of many IT players with regards to pending projects.

We expect Tier-1 IT companies to report a revenue decline in the range of 5-8 per cent QoQ in constant currency (CC) terms. This, coupled with a cross-currency headwind of 30-60 bps, will further negatively impact dollar revenue growth,” said ICICI Securities.

Tech MahindraWipro and HCL Technologies are likely to see around 8-9 percent sequential fall in the topline but L&T Infotech may be best among them as well as midcaps, reporting 4.5-5 percent decline in revenue QoQ, according to MoneyControl.

To sum it up, the IT sector managed to save itself from a greater fall but there was a noticeable loss of revenue and profits.

What is the Good, Bad and Ugly for the IT sector?

Good

  • Work from home means decreased fixed costs
  • Remote work policy promoted by many companies
  • Plenty of potential post-COVID-19 once market recovery begins.
  • COVID has given a boost to E-Commerce bridging the gap between Retailers and Customers.
  • The E-Commerce growth boosts prospects in IT, Logistics, Transport and Auto Industry.
  • Mid Caps hold advantage over Tier 1 IT stocks
  • Atmanirbhar Bharat and Reliance’s 5G announcement leave long term investors pretty optimistic.

Bad

  • As Force Majeure clause implementation increases, there is a lot of credit default and rise in bad debts with respect to minor IT contracts. However, the Tier-1 companies remain safe because of Higher Cash Reserves
  • SMEs are impacted the most due to high credit dependency, reduced sub-contracting demand from foreign companies and leveraged projects are impacted the most.

Ugly

  • Mass Layoffs across the world has shaken the IT industry. Companies like Cognizant made mass layoffs, benching almost 18000 staff in Karnataka.
  • The US H1B visa ban prospects for projects in the US remain bleak.
  • Startups with conventional themes were forced to shut shop.

With this, the future prospects for short and medium-term investments remain volatile. In order to book profits in the market, it is necessary to recognize a suitable entry point. Health agencies across the world are fearing the second wave of coronavirus. However, with the preparation done in the first wave, it can be expected that the second wave may not impact the IT sector after all. Companies have already begun with the human trails of the vaccines. There is substantial optimism that the vaccine might be our very soon. If the vaccine indeed does come out you can expect a fair recovery in broad markets and a rally in the IT Sector as well.

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