Valuation Pulse – IT and ITeS industry - Q4 FY20

We are pleased to present Valuation Pulse for the financial year ending 2019-2020 (FY20).

The COVID-19 pandemic has impacted the entire world, including Indian IT companies that have considerable exposure to global economies such as the United States of America (USA) and Europe. However, the valuations of tech companies globally, and in India, have seen resilience and outperformed the larger stock market. In India, despite Nifty IT dropping by 18.5% during the period between 31 December 2019 and 31 March 2020, it outperformed Nifty 50 by ~10%. The global tech companies have performed even better with the S&P 500 IT dropping by 12.2% during the same period versus 20.0% decline in the S&P 500.

Some resilience from the Indian IT companies compared with the overall Nifty index can be explained by ~5% depreciation in INR versus USD (between 31 December 2019 and 31 March 2020) and also expectations from certain core verticals, such as healthcare, utilities and telecom,  to drive the growth in H1 FY21.

The decline in valuation multiples of IT companies in the recent quarter is primarily on account of:

• Loss in revenue, primarily in March 2020, due to lockdown in India and globally
• Inability to ramp-up projects due to employee utilisation issues caused by work from home policy implemented during the later stages of Q4 FY20
• Segments, BFSI, manufacturing, retail, aerospace and automobile, witnessing severe impact due to COVID-19

On the transactions front (M&A and funding), in FY20, the transaction activity in the IT sector improved marginally compared with FY19, both in volume and value terms (after adjusting for HCL-IBM transaction in FY19 which was an outlier). Among large-cap companies, Tech Mahindra made the highest number of acquisitions in FY20, followed by Infosys and Wipro. As expected, COVID-19 put a pause on transaction activity in April. However, in May, the transaction volume increased to a near-normal monthly run rate. Further, the current pandemic has increased the reliance on technology that is expected to result in higher transaction activity in the sector once things normalise.

We hope you will find this publication insightful and informative.