HDFC Securities: Indian IT built to last: HDFC Securities

The Indian IT sector is ‘built to last’ and will navigate the near-term economic shock, according to a new report by brokerage firm HDFC Securities.

There is likely to be limited impact on service delivery on account of the Covid-19 outbreak, but there is uncertainty around pipeline conversions, it said.

“We have cut EPS estimates by ~7% (rev cut 2-7%) … factoring delay in pipeline conversion and core business vol./pricing impacting 1Q/2QFY21. Impact on travel and hospitality segment expected to be higher (Mindtree/Hexaware). Tailwinds include increase in outsourcing intensity, USD-INR and G&A (travel cost at 1.6 – 4.2% of rev),” it said.

Beyond Covid-19, HDFC Securities’ analysts expect a moderate acceleration in deal pipeline, with a 5-20% increase in the value of digital deals. The growth in digital would continue to be driven by existing clients, pointing to increasing stickiness, while there was also likely to be vendor consolidation.

Tech spends in banking and financial services are likely to be robust despite a growth slowdown. This is because banks continue to invest in building digital platforms and channels and decommissioning legacy applications as they deploy more automation and bots. Further, infrastructure modernisation project come about with the shift to hybrid cloud, and investments are also likely to continue in security and RegTech.

Indian IT firms have also managed to improve their onsite metrics by reducing dependence on H-1B visas. “Indian IT’s H-1B dependence has lowered based on increasing localisation, lower H-1B count & geo-diversification offsetting the impact of rising H-1B wages. Onsite wage inflationary risk mitigated by geo diversification of H-1B (shift to lower cost delivery locations of Texas, Virginia, Florida, Connecticut as compared to California and NYNJ cluster),” said the report.

The other factors which are favourable to the Indian IT industry at present include a shift to hybrid cloud and multi-cloud models, increase in size of digital deals, the focus on verticalization of cloud offerings presenting a large opportunity and accelerated digital growth in the core verticals of banking, financial services and retail.

Source Article

Lois C. Ferrara

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