The adverse impact of the coronavirus pandemic on businesses across the globe is undeniable. The global economy has entered a recessionary phase and it would be a long time before it would be able to get back on its feet. It’s interesting to note how various sectors of the economy are coping in these troubled times.
With people confined to their homes, technology usage has reached unprecedented levels. It would probably be worth examining the IT sector and to what extent it has been affected by the pandemic.
It is quite evident that IT has been hit like all other sectors. Revenue growth in the Indian IT sector is at a 10-year low of 2%, and a growth range of 0-2% has been predicted by Crisil. Margins are suffering as well. There are a number of factors contributing to this slump:
- Demand shortfall. Companies are limiting their discretionary spending on IT services in an effort to limit risks during uncertain times.
- Disruptions in the electronic value chain due to impacted supply of raw materials and difficulties in delivering products to consumers.
- IT companies are still investing in complex projects in order to deliver superior services to clients. Increasing costs combined with declining revenues have contributed to falling margins.
Some market participants have been hit harder than others. Mid-level companies typically have fewer clients and invest their resources in fewer avenues when compared to their larger counterparts. Infosys, one of India’s largest IT companies, has secured deals worth more than $1.8 billion in recent quarters, which means it have something to go on. This being said, new contracts will be hard to come by in the near future.
As companies have adapted to the global situation, numerous benefits have accrued to the IT sector. Some of these are mentioned below:
- Remote work has become the new norm. The use of services such as Zoom, WebEx, and Google Classrooms for the purposes of conferencing, education, and transfer of content has contributed to the inflows of the companies providing the services. With a growing remote workforce, demand for hardware devices such as laptops has grown as well.
- The growth in the ‘work from home’ culture has led to increased spending on and development of cloud infrastructure and specialised software. This has also led to demand for development of cyber security services as online interactions raise various privacy concerns.
- The strain on servers to provide bandwidth has increased considerably in the last couple of months. Data providers have started shifting their focus to improved technologies such as 5G to keep up with the requirements of customers.
While economic activity in the sector has greatly slowed down, many industry experts and agencies have stated that the slowdown is temporary and will not continue to be as severe as it is now. China is one of the largest economies in the world, with a GDP of $15 trillion, which is more than the combined GDP of several major European countries like Germany, the UK, France, Italy, and Spain. China is one the few countries that has recovered a great extent, despite being the country where the virus originated. China’s economic recovery might spur the global economy on to a quicker recovery than previously anticipated.
IT services are used as inputs in various sectors such as banking, financial services, retail, and aviation. Some sectors continue to operate with a reasonable level of activity, while others have completely halted operations. Banking, education, and financial services have managed to stay afloat due to the nature of their businesses, while major industries like oil, aviation, and retail are experiencing very low levels of demand, which is affecting revenues and margins.
Concluding remarks
IT companies have taken a hit and are reeling. However, the sector has not come to a standstill. Companies are gradually adjusting their strategies to adapt to the situation and are expected to do better during the second half of 2020. The road to recovery is a long one and depends on the course the virus takes and if a treatment/cure becomes available down the line.
Written by: Aahan Tulshan
References:
ET Markets. (2020). IT sector revenue growth may hit decadal low due to Covid-19: Crisil.. https://economictimes.indiatimes.com/markets/stocks/earnings/it-sector-revenue-growth-may-hit-decadal-low-due-to-covid-19-crisil/articleshow/75352446.cms
Deloitte. (2020). Understanding the sector impact of COVID-19-Technology Sector. https://www2.deloitte.com/content/dam/Deloitte/global/Documents/About-Deloitte/COVID-19/COVID-19-Impact-Technology-Sector.pdf
Giriprakash, K. (2020). IT sector will have a temporary setback due to Covid-19: Analysts. https://www.thehindubusinessline.com/info-tech/it-sector-will-have-temporary-setback-due-to-covid-19-analysts/article31286612.ece
Written on: 5th May, 2020.