Revenue of IT services firms may drop upto 15% in June quarter: Analysts

The results season for information technology (IT) services giants is set to begin soon, likely giving us an indication of how the Covid-19 pandemic has affected the sector. 

TCS is scheduled to announce its results for the first quarter of financial year 2020-21 on Thursday, followed by Wipro, Mindtree, Infosys and HCL a week later.

However, the companies are unlikely to provide any guidance for the September quarter or for the rest of the year, as the demand situation remains unpredictable, analysts said.

Analysts expect the firms to see a topline decline between 5% and 15%, both on a quarter-on-quarter and year-on-year basis. This is unprecedented for the $190 billion export-oriented software industry, which has consistently grown 8-10% every year for more than a decade and at a much higher rate before that.

“There is limited visibility on recovery, coupled with the risk of a potential second wave, should render it challenging for companies to provide guidance even this time. Despite the partial impact of Covid-19 in Q4 of FY20, deal bookings remained resilient, with net new signings showing a strong increase,” Mumbai-based brokerage firm Motilal Oswal Financial Services said in an earnings preview report.

It firms get most of their revenue from existing deals. However, their large enterprise customers facing losses could have an impact on the IT firms as well. Investors have taken to looking at the deal pipeline as guidance on what to expect for the rest of the year. 

“Deal signings in Q1 FY21 and commentary around the pipeline are likely to be the key focus areas for investors as this is the latest available proxy for demand. Moreover, as this would be the first full quarter where the majority of associates would be working from home, operational metrics like utilisations in the new normal would also give a clear picture,” Motilal analysts said in the report.

While digitisation has become imperative for several companies to remain in business, they are also likely to cut costs in all verticals, including IT, to tide over the pandemic.

“Hopefully, it seems like the worst is over and the demand situation will bottom out in Q1 and we will likely see some growth from Q2. The enterprises will be adjusting their IT budgets for the new normal,” Pareekh Jain, founder of Bengaluru-based IT outsourcing advisory firm Pareekh Consulting, said.

When the US, which contributes to over 50% of the revenue for the IT industry, began to ease lockdown restrictions in May, Chennai-based IT services firm Aspire saw a steady growth in its quantum of work, with better deal traction and wins, its CEO Gowri Shankar Subramanian told TechCircle recently. 

IT services firms are also battling a US work visa suspension, in effect till the end of the year, as a double whammy, as it could result in losses of upto Rs 1,200 crore in the current financial year, credit rating agency Crisil said.