Indian IT majors deal with spillover from pandemic boom

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Growing up in the early 2000s, I recall often wondering how large IT parks started popping up across my hometown, seemingly out of thin air. Empty streets were soon filled with legions of office-going folk on their daily commute to work.

India’s IT sector ensured the country did not miss out on the globalization gold rush of that era, when the internet slowly began tightening its grip on the modern world.

The contribution of the IT space to India’s gross domestic product has risen from 1.2% in 1998 to 8% in 2020. Furthermore, the sector is set to become a US$227 billion industry in fiscal year 2022 and is expected to register a 15.5% growth, which is the highest in over a decade and almost twice the rate of the Indian economy.

So, despite fattening profits and rising revenues, why then has the Nifty IT subindex (.NIFTYIT), which tracks the performance of the IT space in India, fallen nearly 16% this year?

Global macroeconomic factors such as inflation and the Russia-Ukraine war have certainly weighed. Infosys (INFY, NSE), India’s second largest IT firm, joined the corporate boycott of Russia over the invasion of Ukraine earlier this month.

Another factor driving negative investor sentiment is the fear of growth normalization in the sector after a pandemic-led boom.

Digital transformation spurred by funds streaming into tech services such as cloud computing and cybersecurity during the Covid-19 pandemic propped up demand for services provided by Infosys and rivals Tata Consultancy Services (TCS, NSE), Wipro (WIPR, NSE), and HCL Technologies (HCLT, NSE).

Image credit: Timmy Loen

This lifted the Nifty IT services index 60% last year. The National Association of Software and Service Companies has pointed out that before the pandemic, Indian IT firms were reporting annual growth rates of around 6% to 7%, which have now increased to around 15% to 20%.

However, India’s big IT companies have so far crumbled under raised market expectations and have ceded some of their spectacular gains from 2021. TCS and Infosys both posted fourth quarter profits below expectations this month.

Margins have also come under pressure as operating expenses rise due to a talent war in the space. The entry of VC-backed startups, which compete for the same talent pool, is driving up the IT industry’s compensation metrics, leading to higher attrition rates.

Meanwhile, over in Indonesia, it is the VC-fueled Bukalapak (BUKA, IDX) making waves on the stock market. The ecommerce behemoth has staged something of a comeback after a dreadful start to its life as a public company. Its shares have risen nearly 20% in the last month.

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