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Valuation Pulse - IT and ITeS industry Q2 FY 21

We are pleased to present Valuation Pulse for the second quarter ending Financial Year 2021 (Q2 FY 21).

While the COVID-19 pandemic impacted industries across sectors, the IT and ITeS industry has had a positive impact and it is reflected in its sharp recovery of revenue and margins to pre-COVID levels.

In the current new normal environment, majority of the IT spends have now become a necessity for efficient operations of businesses. Such accelerated IT spends for cloud migration and digitalisation has led to strong deal wins and pipeline despite the crisis looming out of a pandemic.

With accelerated demand and liquidity in the markets, the valuations of global tech companies continued to exceed pre-covid levels with the S&P 500 IT index increasing by approximately 31% between now and 31 December 2019 versus 10% increase in S&P 500 index. The valuations of Indian IT and ITeS industry have also continued to exceed pre-covid levels and outperformed the overall market indices. Nifty IT is up by 36.8% since 31 December 2019 while Nifty is up by only 5.7%.

Key trends observed in the industry during Q2:

  • Sharp recovery in majority of verticals except manufacturing, hi-tech and semiconductors where companies witnessed sluggish growth mainly on account of client specific issues or delays in decision making due to remote working
  • Continued efforts by managements on cost control measures, lower SG&A expenses, lower attrition rates and higher utilisation rates coupled with recovery in revenue during the quarter has led to strong uptick in margins that was slightly offset by unfavourable currency fluctuations
  • Continuing trend of vendor consolidation by clients for cost optimisation has helped IT companies win more deals
  • With revenues reaching pre-COVID levels, IT companies have started declaring wage hikes and increase in head count that will pan out in upcoming quarter.

On the transactions front [mergers and acquisitions (M&A) and funding], IT and ITeS industry witnessed rebound of transaction volumes and values especially from large cap companies. Among large cap companies, except TCS, all others have marked their presence by acquiring couple of companies during the quarter and in October 2020. In Q2, two of the big-ticket transactions involved acquisition of companies operating in data centres business, reflecting an increasing trend of data localisation. Further, IT companies focused on acquiring technologies, such as cloud management platform and IT consultancy companies offering digital transformation, data and business analytics and robotic process automation services.

We hope you will find this publication insightful and informative.