The second half of Q4 for the Financial Year 2019-2020 has witnessed varying levels of COVID-19 disruption across most of the core markets, including the US, Europe and even India. This is expected to overshadow the Q 4 results of Indian IT companies.
Analysts observe that unprecedented level of uncertainty is expected to have impact on near-term growth and profitability of most of the Indian IT companies. It is also expected that Indian IT companies may delay their guidance on the FY 2020-21 outlook or provide a wide guidance band, subject to sharp revisions later as customers will re-look at their IT budgets.
A recent preview by the research firm Motilal Oswal Institutional Equities observed that the second half of Q4 for FY20 witnessed varying levels of COVID-19 disruption. According to the preview, most of the IT companies did a reasonably good job in controlling the damage by resorting to options like ‘work from home’ but added that all service offerings cannot be delivered from home for a variety of reasons. In conjunction with lower productivity, both billing and utilisations in Q4 of FY 20 would be impacted states the report.
As per Motilal Oswal, there will be near-term uncertainty due to COVID-19 pandemic, and added that there will be demand, supply, pricing and receivable uncertainties in the near-term. The report observed that negative news flow around different sectors is likely to continue. It further noted that despite the near-term uncertainty, companies such as Infosys, HCL Technologies and L&T Infotech will do well due to their historical track record in adapting to business challenges and technology change cycles.
According to a report by HDFC Securities, the impact of economic dislocation accentuating in March 2020 has led to major supply side transition for the IT sector, impacting billings. The demand side factors and the second order impact (disruptions in clients and customers) will lead to a bigger dent in the Q4. “We expect Q4 margins to be flattish with the impact of utilisations and negative cross currency mitigated by INR depreciation. COVID-19 situation has aggravated at a fast pace. The impact will also be visible and will have a deeper impact over the next two quarters for IT companies. For the FY 2020-21, I expect a decline of profit after tax (PAT) for most of the IT companies,” said Amit Chandra, assistant vice president at HDFC securities.
The HDFC Securities report further stated that there would be demand and sales velocity impact of COVID-19 on key verticals and core geographies for the Indian IT companies. According to the report, there could also be an impact on service delivery by many IT services companies due to 'work from home' complexities and regulatory hurdles. Similarly, there could be an impact on the progression in the large deal pipelines for many IT companies and thereby may affect the pipeline creation and conversion of large deals.
