Global lockdown forces Indian IT to move to the next tech level

ANALYSIS
Global lockdown forces Indian IT to move to the next tech level
The Infosys logo on display. India’s top four IT services companies have gained between 8.21 per cent and 11.96 per cent on the bourses between January 1 and April 6, 2021.Courtesy: Reuters

Heavyweights like TCS, Infosys, HCL Technologies and Wipro are expected to post another bumper quarter in the January-March 2021 period on the back of increased tech adoption in the US, Europe and India. This has forced many companies to aggressively hire highly skilled professionals and also ramp up their own capabilities to keep up with the market.

In another sign that the Indian economy is on the mend – the Covid surge notwithstanding – the Indian IT sector is expected to post its best fourth quarter numbers in five years on the back of strong investments by US and European companies in digital technologies.

And canny investors are already on to what they consider a good story. Tier I Indian IT majors have been doing exceptionally well on the bourses. Consider these numbers: India’s top four IT services companies have gained between 8.21 per cent and 11.96 per cent on the bourses between January 1 and April 6, 2021.

Infosys is leading the pack in terms of share price increase, followed by TCS, which has gained 11.46 per cent, Wipro 10.05 per cent and HCL Tech. The broader market, as measured by the benchmark S&P BSE Sensex, has risen 2.78 per cent to 49,201.39 during this period.

A man snaps a selfie at the BSE. The lockdown and the acceptance of work from home and increased adoption of technology proved to be the proverbial silver lining on the dark clouds for the IT sector.
A man snaps a selfie at the BSE. The lockdown and the acceptance of work from home and increased adoption of technology proved to be the proverbial silver lining on the dark clouds for the IT sector.Courtesy: ANI

Lockdown was a blessing in disguise

That’s because investors are expecting the sector, which began the 2020-21 financial year on a sombre note, with lockdowns of varying intensities in India, their home base, and the US and Europe, their main markets, to end the year on a high.

Consider these numbers: India’s top four IT services companies have gained between 8.21 per cent and 11.96 per cent on the bourses between January 1 and April 6, 2021.

With revenues and profits down, the sector, it seemed, was staring down the barrel. But the lockdown and the increasing acceptance of work from home (WFH) and increased adoption of technology across the value chain proved to be the proverbial silver lining on the dark clouds that had gathered on the horizon.

Higher rates of digital technology adoption

The much higher rates of adoption of digital technologies both in the West as well as the domestic market and big deal wins, as a result of a sharp rise in spending on IT platforms and their upgrades by many of the world’s leading users of their services, have come as a boon to India’s IT services majors. Not only that, even laggards in technology adoption in these markets also jumped into the bandwagon, thus, increasing the size of the pie; this has contributed a significant proportion of the additional revenues to the sector.

In fact, this trend is not limited to the Indian IT sector alone. Even US-based global IT major Accenture has increased its full year guidance from 4-6 per cent to 6.5-8.5 per cent in dollar terms. This, and some early trends, has given rise to optimism that the Indian IT sector will follow the same trajectory.

Higher rates of digital tech adoption and big deal wins, as a result of a sharp rise in spending on IT platforms, have come as a boon to India’s IT services majors.

The party will carry on

A report by leading Indian brokerage Edelweiss dated April 1 said: “The upward guidance revision by IT companies three quarters ago would be followed by upgrades in consensus forecasts for quarters to come.”

As a result, analysts are expecting another bumper quarter in the January-March 2021 period. “Over the 5 per cent QoQ posted in 3QFY21 and 6 per cent in 2Q, we expect the sector to deliver 3.9 per cent QoQ during the January-March quarter,” an HDFC Securities report said.

In fact, analysts are betting that this could be the best fourth quarter for the Indian IT sector in five years and that revenues and bottom lines will continue to grow at a smart pace.

Rising demand for IT services has been accompanied by matching demand for professionals with knowledge of critical technologies such as AI, ML, data science & analytics, etc. This is increasing costs.

Rising costs a worry

However, the rising demand for IT services has been accompanied by a more than matching demand for professionals with advanced skill sets in and knowledge of critical technologies such as artificial intelligence, machine learning, data science & analytics, data engineering, data visualisation, network and information security (cybersecurity) and cloud computing.

This is also expected to hasten the pace of new technology adoption in the Indian IT sector and will help it scale up its capabilities and put it in a better position to move up the ladder to a higher level of technical competence.

The last few quarters have witnessed a massive increase in demand for professionals having these skill sets. This has resulted in higher than usual levels of attrition and an increase in wage levels as companies struggle to retain their best talent in the face of aggressive offers from rivals.

Going forward, this could weigh on the margins of the Indian IT sector, analysts said. But that, they added, would be a small price to pay as the gains from the hastened pace of new technology adoption could cover the additional costs over the medium term.

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