IT services firms such as HCL Technologies and Tech Mahindra are said to be better placed than their bigger peers Infosys and Tata Consultancy Services (TCS) to withstand the impact of the coronavirus outbreak.
According to analysts, while discretionary spend by global enterprises is likely to negatively impact all Indian IT firms, more revenues from products and less exposure to financial services segment are likely to lessen the impact for HCL Technologies and Tech Mahindra.
“HCL Technologies and Tech Mahindra are more defensive large-cap stories to play amidst the coronavirus outbreak, given higher annuity through IMS (infrastructure management services) and product revenues for the company. Similarly, higher exposure to defensive segments like telecom and lower exposure to banking, financial services and insurance, (BFSI) — only 13 per cent of revenues — work for Tech Mahindra,” said an ICICI Securities report.
All IT services companies have widened their travel restrictions from China to many other nations, including Italy, France, Singapore, South Korea, and Japan. Several of them even have imposed a restriction on non-essential travel to the US, which accounts for 60 per cent of the revenues of Indian IT companies.
While travel and automotive sectors have been severely impacted due to the ongoing spread of COVID-19, cancellations of meetings, travel plans and other such business disruptions are likely to pull down global growth in the current year.
Analysts have already started factoring in the effect of a global slowdown on the IT spend of companies.
Typically, discretionary spends are mainly instrumental for driving large transformational projects. During a slowdown or uncertain business environment, clients hold back such expenses first, though spends on ongoing research and development (R&D) continue to run the business.
“In theory, Infosys should be impacted more than TCS on a relative basis if coronavirus issue lingers, given its higher exposure to discretionary spends. However, a lower base and wallet share gains should ensure that its growth is not markedly different from TCS in FY21 and FY22,” the note said.
“R&D spends are generally more resilient in an uncertain macro relative to IT spends, which puts HCL Technologies in a good stead,” it added.
In a research note, another brokerage firm IndiaNivesh said HCL Tech’s product business from its recently acquired IPs (intellectual properties) from IBM provides it assurance in revenue flows.