India's IT services industry should brace for challenging times ahead

The actual impact of the coronavirus outbreak on the India’s IT services industry is now coming to the fore, with the number of new contract signings showing a consecutive decline over the past couple of months. While the extent of the drying-up of contracts will depend on how long the outbreak ultimately lasts, the Indian IT services industry should prepare itself for challenging times ahead, says GlobalData, a leading data and analytics company.

The Indian IT services industry has been enduring challenges for a while now–weathering fears of an impending slowdown and the lingering trade war tensions. However, the recent spread of the outbreak to several countries in Europe and the US will pose a serious challenge as both the regions have been critical for almost all IT services vendors in India.

GlobalData’s IT contracts database, which tracks the publicly announced IT contracts, reveals that the number of IT services contracts signed in February 2020 have shown a monthly decline of 33%. Compared to February 2019, this is an annual decline of 37%. Even in January 2020, the number of IT services contracts were down 15% from the month before.

Nishant Singh, Head of Technology and Telecoms Data at GlobalData, says: “The decrease in the new contract signings for the past two months are from a period when the coronavirus outbreak had been primarily restricted to China and Iran. Given the current spread of the outbreak, we expect fresh contracts to become even scarcer over the next few months.”

Depending on how long the outbreak lasts, this could indeed become a serious problem for the IT services sector. Typically, the services industry has a bit of a cushion owing to the contracts in the pipeline. However, the coronavirus outbreak is fundamentally challenging the way the IT services firms function. With various businesses trying to contain the epidemic by restricting the movement of personnel, it will also prove to be difficult for the services industry to deliver services on-site, which will make it difficult to execute large and complex contracts.

Indeed, some Indian IT services firms are now likening the impact of the coronavirus impact to that of the 2008 recession, and have expressed concerns that the outbreak could affect their financials; although, the implication of the outbreak will probably manifest itself over the next few quarterly earnings. Industries like travel and tourism, manufacturing and retail have been strongly affected by the outbreak, and IT services vendors having significant exposure to these verticals could find it challenging to have a healthy order book.

Singh concludes: “The next fiscal will be very challenging for the Indian IT services industry as the discretionary spending of clients will be lower as a result of the coronavirus outbreak and new projects are likely to be postponed until the outbreak is contained to some extent. While the Indian IT services industry has proven itself to be resilient time and again, in coronavirus, the industry will face it’s most difficult challenge yet.”