Indian IT sector may beat COVID-19 blues with cash reserves, discounts

The top-tier of the Indian IT sector appears ready to weather the challenge

Infosys-tech-park-IT-sector-building-employees-1-Bhanu Top-tier IT companies such as Infosys, Wipro and TCS have huge cash reserves | Bhanu Prakash Chandra

Despite challenging times brought on by the COVID-19 pandemic, large Indian IT Sector companies are poised to absorb whatever hit their businesses might take, on account of their long-term relationships with Fortune 500 clients, early preparation for revenue losses and capacity to adapt to new forms of demand and pricing.

With global IT spending poised to take a hit, especially in the US and Europe, IT companies may adopt new strategies to deal with the situation in order to win new customers and retain existing customers. Many may rework their pricing strategy to attract customers, as well as their deal sizes in a bid to reduce their billings.

Top-tier IT companies such as Infosys, Wipro and TCS have huge cash reserves—estimated at over $13 billion when put together—which can help them sustain their business for a long time. They can also negotiate with their customers on account of their strong brand value. A drop in business may not have an immediate detrimental effect on them.

In addition, it is unlikely that Fortune 500 companies will terminate projects with them, given their long-term engagements. However, projects may become short term ones and customers may get many more discounted pricing offers from Indian IT players.

“I think IT services companies would offer loyalty discounts and in some cases redraft the scope of work. These would reduce the deal sizes and hence their billings. They’d be able to retain the customers by this gesture. At the same time, they’ll keep optimising their costs to cushion the drop in margins. IT products would similarly bring in a few pricing measures to attract new customers. The new proposals will be priced attractively as well because the number of opportunities would come down,” observes Aditya Mishra, Director and CEO of CIEL HR Services.

Despite sector specific challenges facing businesses in travel and tourism, the top tier IT companies have numerous Fortune 500 customers. Some of them have very recently won large deals—A report on the IT sector by Emkay Global pointed out the order booking for IT companies in the last quarter was reasonably strong. This was aided by large-deal wins for the likes of TCS—a $1.7 billion total contract value (TCV) deal at Walgreens—and HCL Technologies (which had large deal wins with Stanley, Black and Decker and Fonterra) and also by Cognizant which saw a 30 percent YoY growth in the TCV of deal wins in the quarter ending March 2020.

The report mentions that Indian IT companies were very swift in taking cost saving actions including taking steps to freeze lateral hiring, deferring annual hikes and promotions; the companies had foreseen challenges arising from revenue pressure and lower utilisation, as well as likely price cuts (which, as of now, are taking place in the more-troubled verticals in travel, hospitality and retail).

It is also a fact that the business models of large Indian IT companies Indian IT companies are typified by a combination of low-to-moderate growth and very high profit-to-cash-conversion dynamics.

Though the next two quarters may be uncertain, they may also create new opportunities for Indian IT companies.

“The demand environment for top-tier IT companies might be bested with uncertainty owing to COVID-19 and the ensuing slowdown. But, there is a strong possibility that once the economy limps back and the inventory replenishment cycle kicks in, the demand will come back. The Fortune 500 companies are well-capitalised and the US government has signalled its intent to provide loans to obviate economic distress. The psychological impact of the COVID-19 pandemic will ensue an increase in the odds for greater investment in automation in all spheres of IT operations. Indian IT companies are likely to be beneficiaries of this development,” remarked Alok Shende of Ascentius Consulting.