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Valuation Pulse - IT and ITeS industry Q1 – FY 21

We are pleased to present Valuation Pulse for the first quarter ending Financial Year 2021 (Q1 FY 21).

The COVID-19 pandemic has created major economic crisis all over the world but parallelly paved way for new opportunities for certain industries. One among those is the IT and ITeS industry.

Accelerated demand, along with liquidity and general positive outlook has led to a v-shaped recovery of valuations for all IT companies globally and in India. The valuations of global tech companies have now exceeded pre-covid levels with the S&P 500 IT index increasing by approximately 24% between now and 31 December 2019 vs. 4.4% increase in S&P 500 index. The valuations of Indian IT and ITeS industry have also exceeded pre-covid levels and have outperformed the overall market indices. Nifty IT is up by 15.7% since 31 December 2019 while Nifty is down by 7.1%.

During the quarter, some key trends observed in the industry include:

  • Despite decline in revenues due to lockdown, IT companies saw a robust pipeline, on account of demand for cloud migration/infrastructure, digital solutions, cyber security solutions, etc. as the pandemic accelerated digital transformation projects of clients.
  • Despite witnessing a decline in revenue, most companies managed to either maintain Q4 FY 20 margins or marginally improve the margins on account of one-time reduction in travel costs and significant cost control measures taken by the managements either by freezing the hiring, cutting down on SG&A expenses, etc.
  • The supply constraints faced during the beginning of the quarter were quickly addressed through work from home model.
  • Increasing trend of vendor consolidation by clients for cost optimisation has helped IT companies win more deals.

On the transactions front [mergers and acquisitions (M&A) and funding], IT and ITeS industry witnessed lowest level of transaction volumes among last four quarters mainly due to disruption caused by the pandemic in Q1 FY 21 and same is reflected in the muted transaction activity in April and May 2020.

However, the transaction activity in June and July 2020 have shown signs of recovery both in value and volume terms indicating return of near-normal transaction activity. The current pandemic has increased the reliance on technology and the same is reflected in increased transaction activity in automation software, big data analytics, cloud communication and infrastructure segments that is expected to gather pace in future.

We hope you will find this publication insightful and informative.