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Editorial

Royal Enfield – Eicher Motors’ Golden Baby

Have you ever desired to travel cross-country in a Royal Enfield? Each model of RE has a unique and aspirational value attached to it. The Royal Enfield Classic, Standard, and Himalayan have established themselves as benchmarks in the motorcycle industry. The company holds more than 90% market share among motorcycles that have engine displacement within 250-750cc. 

In this article, we shall analyse how well the motorcycle brand is growing under its parent company. How does it compete with other cafe racer brands across the globe?

Royal Enfield – A Brief Profile

RE started its operations in England at the end of the 19th century. In 1932, the company introduced the evergreen model “Bullet” at a motorcycle show in London. It received an order from the Indian Army in 1952 for 800 350cc Bullets. The initial success in India made the foreign company partner with Madras Motors to form Enfield India. Eventually, they introduced Continental GT and the Interceptor, which hit good sales volumes. Towards the end of the 90s, the automaker was in serious financial trouble. Moreover, the parent company in London had already closed its operations in 1967. 

Around the same period, a family-run business in India was finding it difficult to find its momentum. They first tried importing trucks to India back in 1948. This was followed by a partnership with Mitsubishi for manufacturing commercial vehicles (CV). All these businesses were not showing exponential growth. They were unable to attain a significant market share in the CV segment. Thus, the company made a bold decision in 1994 to acquire the financially wrecked Enfield India. That saviour is the current parent company of the two-wheeler manufacturer— Eicher Motors Ltd. 

Eicher saw a huge market for two-wheelers in India. It divested other businesses and started to concentrate on the newly acquired vertical. The introduction of the RE Classic was a great success in India, followed by the release of Himalayan in FY17. The company also relaunched the 650cc twins (Continental GT, Interceptor) and Meteor 350 in FY21. There was also an uplift of the Classic 350 recently. 

The main trump card of RE models is that they are affordable when compared to similar segment models. Let us take an example of Continental GT, which is tagged at a starting price of Rs 3 lakh. Similar cafe racer models such as the Honda CB650r start at Rs 7.7 lakh, while the Suzuki SV650 starts at Rs 7.5 lakh. RE’s affordability factor has led to the growth of a strong customer base in developing markets like Latin America and several countries in Southeast Asia. 

Global Presence

Royal Enfield started its North America division in 2015, followed by a research and development centre (R&D) in the United Kingdom in 2017. The two-wheeler manufacturer currently has 140 stores beyond the borders of India. In developing markets in the Asia-Pacific region, Enfield has 48 exclusive stores, with Thailand leading from the front. In Latin America, RE holds a significant share in the markets of Argentina, Brazil, and Colombia.

Domestic Sales

In the financial year 2015-16 (FY16), the automaker recorded total domestic sales of 4,98,791 units. It grew to 8,05,273 units in FY19, at a CAGR of 17.2%. In FY20, the manufacturer recorded a sharp decline in sales. Total sales stood at 5,73,728 units at the end of FY21. This can be attributed to the Covid-19 pandemic and the lockdowns imposed in various parts of the country.

Interestingly, 91% of the total sales are derived from the sale of 350cc models. The company has a 27% market share in the above 125cc segment as well. Royal Enfield has a 94% market share in the 250-750cc mid-size motorcycle segment.

Profitability

By analyzing the financial reports of Eicher Motors, we see that RE’s total revenue from operations stood at Rs 8,619 crore in FY21, which has grown at a CAGR of 5.2% from Rs 7,038 crore in FY17. The decrease in sales of two-wheelers has resulted in negative growth in revenue as well.

Now, let us analyze the profitability of the brand with other major two-wheeler manufacturers in India. 

Return on Equity (ROE) is a financial ratio that measures the company’s efficiency to generate profits with respect to shareholders’ equity. In FY21, Royal Enfield reported an ROE of 14%, which means that for every Rs 100 invested in the company, it can generate Rs 14 as profit. 

Here, we can see that all automakers have been facing serious issues even before the onset of the Covid-19 pandemic. Royal Enfield’s ROE has almost halved in 5 years. 

Eicher – A Consolidated Profile

As mentioned earlier, Eicher divested their operations in other business verticals like tractors and started to concentrate on two main branches— Royal Enfield and a commercial vehicle joint venture with Volvo Group (Volvo-Eicher Commercial Vehicle or VECV).

VECV primarily concentrates on Light & Medium Duty (LMD) trucks, buses. In 2020, VECV acquired Volvo Buses India (VBI). The automaker produced 41,268 CVs in FY21. In the LMD segment across India, the company enjoys a market share of 30%.

The Earnings before Interest, Tax, Depreciation, and Amortisation (EBITDA) margin of RE’s verticals are shown below: 

We can see that Eicher’s commercial vehicle (CV) vertical is a low-margin business compared to the two-wheeler vertical. Royal Enfield was able to retain 21% of total revenue as income, while the figure stood at 7% for the CV segment. It is interesting to note that both Enfield and the CV vertical generated revenue of around Rs 8,700 crore in FY21, in which RE retained higher profits.

Conclusion

The increase in the total working population in India, along with high disposable income and decreasing interest rates on vehicle loans, has fueled Royal Enfield’s sales. As per rumours, Hunter 350, Roadster 650, and Scram are some of the company’s upcoming models. The arrival of the facelifted Classic 350 shows that Enfield is updating their models at regular intervals, which will help improve sales. RE is constantly working towards establishing a strong global presence as well. The company has been able to generate an aspirational value for its brand in countries such as Thailand, Argentina, Brazil, and Columbia. However, there is heavy competition from international players such as Honda and Suzuki. The slowdown in the global automobile sector is also weighing down on the company.

The shares of Eicher Motors have rallied by ~29.7% over the past year. Currently, it is trading at Rs 2,852, 6% below its 52-week high. 

Let us look forward to seeing how Royal Enfield implements its strategic plans. What are your thoughts about the company? Let us know in the comments section of the marketfeed app.

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Editorial

KIMS IPO: All You Need To Know

Krishna Institute of Medical Sciences or KIMS’ IPO has gone live on June 16, 2021. A private healthcare services company with a stronghold in Andhra Pradesh and Telangana, the company is likely to give fair competition to other listed stocks like FORTIS and Apollo Hospitals. Let’s talk about what the IPO has to offer.

The Business Model

  • Broadly speaking, any hospital has two sources of revenue, an In-Patient Department(IPD) and an Out-Patient Department(OPD). A minor health checkup, a follow-up checkup after surgery, or a regular visit to a physician counts as an OPD. Anything major involving critical care or a stay at the hospital is handled by IPD. 
  • For the Indian Healthcare Industry, ~70% of the revenue comes from Inpatients which includes surgeries, critical care, general care, and other care.  An interesting pattern was observed over the IPD and OPD figures. It seems that KIMS makes most of its money only through IPD. The volumes for inpatients is relatively low but has pretty high revenue. The opposite is true for OPD, where the volumes are relatively high but revenue doesn’t seem significant for the volume. This could talk a lot about the way the healthcare system in general churns money. 
.2018201920209M 2021
Inpatient Volume 88,577 111,382 140,676 83,860
InpatientRevenue Rs 594.7 CrRs 717.6 CrRs 879.9 CrRs 778.3 Cr
Outpatient Volume  661,000 900,043 1,137,560557,071 
Outpatient
Revenue		Rs 152.7 Cr Rs 195.6 CrRs 238.8 CrRs 192.1 Cr
All Figures in Rs Crore
  • KIMS offers 25 types of speciality and super speciality services at its various hospitals. As of December 31, 2020, the total bed capacity of the hospital stood at 3064 beds across 9 locations viz. Secunderabad, Nellore, Rajahmundry, Srikakulam, Kondapur, Ongole, Vizag, Anantapur, Kurnool. Close to 50% of the group revenue comes from the KIMS Secunderabad facility. 
.2018201920209M 2021
Bed Capacity2,1202,8043,0043,064
% Occupancy75.83%71.83%80.49%72.00%
  • The major revenue-generating specialities for KIMS are Cardiac Sciences(20.98% of Group Revenue) and Neuro Sciences(14.67% of Group Revenue).
  • KIMS’ healthcare services are classified as ‘affordable’ to an extent. The company Average Revenue Per Patient(ARPP) was Rs 79,000 per person which is 41% less compared to the Industry Average of 1,12,000 per person. KIMS manages affordability by optimizing bed usage, cost management and variable compensation to doctors based on patients attended, work hours, the severity of case etc. 
  • The company prospectus states that it is working towards expanding in markets like Bangalore, Bhubaneshwar, Chennai and some cities in central India like Indore, Aurangabad, Nagpur and Raipur.
  • There are three factors that can add to the company’s performance: 1) Patient Volumes 2) Occupancy Rate of Beds 3) Cost Management Per Bed Occupied.

Finances

.2018201920209M 2021
Revenue7,000.49,238.67 11,287.28 9,773.77 
Profit(461.90)(485.86) 1,150.72 1,468.58
Debt7,032.122,880.97 3,207.79 2,146.30
All Figures in Rs Crore

From the table given above, we can concur that the revenue has grown significantly over the past three years. In fact, KIMS has managed to surpass past annual figures in just 9 Months of FY 2020-21. The company drove up from a loss in 2018 and surpassed FY 2019-20’s profit figures in just 9 months of FY 2020-21. Moreover, the company now holds less than one-third of the debt it owed in 2018.

.2018201920209M 2021
Average Revenue Per Occupied Bed18,80718,33418,30721,823
Average Length Of Stay(Days)4.494.474.345.30
All Amount In Rupees
  • The Average Revenue Per Occupied Bed(ARPOB) decreased between 2018-2020 till we saw a sudden spike in 2021, obviously due to the onset of COVID-19. The Average Length Of Stay(ALOS) too spiked in 2021. This increased the overall revenue and profits in 9M 2021. 
  • The company offers the best Return On Capital Employed as compared to its peers. KIMS offers a ROCE of 22% followed by Narayana Health at 16%, Apollo Hospitals at 12% followed by the rest. The company also offers the highest turnover ratio(1.4) in the industry along with Apollo Hospitals. This means that the company is able to generate revenue efficiently from the assets it owns.

IPO Details

IPO Opening DateJun 16, 2021
IPO Closing DateJun 18, 2021
Issue TypeBook Built Issue IPO
Face ValueRs 10 per equity share
IPO PriceRs 815 to Rs 825 per equity share
Min Order Quantity18 Shares
Issue SizeRs 2,143.74 crore
Fresh Issue2,424,242 equity shares of Rs 10
Offer for Sale23,560,538 equity shares of Rs 10
(aggregating up to Rs 1,943.74 crore)

The Bottom Line

The past year has been economically beneficial for the healthcare and pharma industry. It is evident from KIMS’ finances that the company has progressed in the time of the pandemic. The company needs to focus on diversifying its geography. While two-thirds of KIMS’ revenue comes from its Secunderabad and Kondapur facilities, other competitors like Apollo, Fortis and others are rather widespread.  

KIMS has an interesting model where doctors own a stake in many of their hospitals. Around 21% of its revenue comes from the top 10 doctors of the company. Although the company has managed to attract the best talent from the country, its revenue depends on very few doctors, any instance where the doctor decides to not work for KIMS could have an adverse effect on the revenue. 

Bed occupancy rates took a hit during COVID-19, however, things are returning to normal for hospitals. If the vaccination drive is successful and we do not see an adverse third-wave of COVID-19, we can expect the company to scale up and reach heights like never before. 

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Editorial

ITC. What you need to know before investing.

itc

ITC Ltd. or Indian Tobacco Company established as Imperial Tobacco Company was established in Calcutta in 1910. It began as a Tobacco Conglomerate, later on expanding to a variety of areas such as Luxury Hotels, Paperboards, Agri-Business and FMCG sectors. ITC is a blue-chip stock and for long been known as a safe investment that gives a high dividend. In case you are planning to invest in ITC, here are __ things you need to know.

Company Profile

ITC’s Revenue Channels. Pre-COVID

ITC is India’s leading tobacco company. It has a near-monopoly when it comes to cigarettes. ITC manufactures more than 84% of India’s cigarettes and controls 75% of India’s entire tobacco industry.

In the late 70s, ITC ventured out into the world of luxury hotels and hospitality. It currently operates more than 100 hotel chains. ITC has been expanding on its FMCG sector having faced a massive growth in revenue from it in the past 10 years. Its Agri-business has gained a fair amount of traction last year with a 9% revenue growth (YoY) between Q1FY20 and Q1FY21 in its Agri-Business segment.

ITC’s inter-segment revenue stood at Rs. 5907 Crores facing a revenue growth of 20% as compared to the same quarter last year. This portrays the efficiency of ITC on being able to manufacture its own raw material and the fair dependability of companies on each other. Over the last 10 years, Total Shareholder Return has grown at a CAGR of 11%, significantly outperforming Sensex (CAGR: 6.9%)

Efficiency

ITC as a company is a virtually debt-free company. Cash generated by ITC is significant for it to fund its own new ventures.

ITC’s ROCE(Return on Capital Employed) stood at 72%. This means for every Rs. 100 worth of Capital Employed ITC earns Rs. 72 on it.

In the past 5 years, ITC’s Basic EPS has seen a growth of 9.1% CAGR. Basic EPS is the net-income generated by the company per outstanding share. Its Cash EPS or cash flow generated per share stood at Rs 13.59/share. Its Cash EPS grew at 9.7% CAGR over 5 years. CAGR stands for Compounded Annual Growth Rate.

Ex-Company Chairman (Late) Y C Deveshwar had set the target of making ITC the biggest player in the FMCG segment by year 2030 targeting revenue of Rs. 100,000 crore from the FMCG business.

Net Cash Flow ITC (Source: Neha Rawat, SCAC)

ITC’s Profitability ratios are better than Godfrey Philips and HUL this means that ITC as compared to industry peers, is financially sounder and is in a better financial position to commit to growth and expansion.

The company’s dividend payout ratio as of March 20′ was 42% which is expected to pump up once the dividend is announced in the future. Dividend Payout Ratio of 42% means the company is giving out 42% of its net profit as dividend.

Coming to the shareholding of the company, the company has 0 promoter holding. Often times in corporates, the management makes decisions that support the interest of promoters or major stakeholder. In ITC, majority stake lies in the hands of public shareholders, the company is likely to make decisions in the public interest.

Tobacco and Diversification.

Cigarette has an inelastic demand. This means that compulsive smokers won’t stop smoking even if the price of cigarettes rise. When the government increases the duty, the cost of it get passed down to the consumer

The COVID-19 pandemic has reduced the contribution of cigarettes in the revenue of the company. It faces a temporary ban for sale and/or public smoking in few states as well. Before the pandemic as well, ITC had been reducing its focus on Cigarettes and Tobacco Products. This has many reasons behind it. According to an ITC report:

  1. India is the 4th largest market for illegal cigarettes in the World; causing a revenue loss of over 15,000 crores every year.
  2. 42% of adult Indian males consume tobacco. Only 7% of adult Indian males smoke cigarettes as compared to 14% who smoke bidis and 30% who use smokeless tobacco.
  3. Since 2010/11, legal cigarette industry volumes have declined by about 20% while the illicit duty-evaded cigarette segment has grown by 36%.
Contribution to Tax of Tobacco is Disproportionate to Legal Sales

The above reasons have led ITC to diversify into other sectors like FMCG and Agri-Business. For ITC, Cigarette Business’ share in the revenue of ITC has reduced over the years and increased in other sectors.

ITC has started pumping into FMCG segment like never before. The graphical representation below shows the expansion of ITC into FMCG products over the past decade.

Gross Revenue Reported over the decade. (Amount: Rs. Crores)

Supply and Distribution Chain.

ITC has the most unparalleled supply and distribution chain in the country. The reason why it has managed to capture 75% of the tobacco market is its supply and distribution chain. ITC has managed to access the remotest areas in the country. To know more about ITC’s supply chain. Click Here

E-Choupal is a business initiative by ITC Limited that provides Internet access to rural farmers. The purpose is to inform and empower them and, as a result, to improve the quality of agricultural goods and the quality of life for farmers. ‘e-Choupal’ services today reach out to over 4 million farmers growing a range of crops – soybean, coffee, wheat, rice, pulses, shrimp – in over 35000 villages through 6100 kiosks across 10 states (Madhya Pradesh, Haryana, Uttarakhand, Uttar Pradesh, Rajasthan, Karnataka, Kerala, Maharashtra, Andhra Pradesh and Tamil Nadu). To Read More about E-Choupal, Click Here.

The Future

ITC has started to shift its dependency from cigarettes to other areas. It suffered a huge reduction in cigarette sales by almost 33%. ITC has realised that its dependency on cigarettes won’t be viable in the long term. During COVID-19, the only two sectors showing positive growth were FMCG and Agri-Business.

ITC is diversified in FMCG and foods segment, with a wide variety of products to offer the company has recently crossed 10,000 crore revenue mark and targets 100,000 crore revenue from FMCG by 2030. A good financial history and a stable distribution setup make it a good company to invest in the long term. However, it is necessary that one performs their own research before investing.

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Editorial Market News

The Rally of the Pharma Sector- COVID19

The Pharma sector has boomed. It is not difficult to guess why. It’s because of the ripples of the COVID-19 pandemic. The NIFTY Pharma happened to move sideways around the new year until March 2020, when the stock price fell for a short period. The NIFTY Pharma Index captures the performance of the pharma sector. This was because of the global economic slowdown. Moreover, indecisiveness on part of leaders to declare a lockdown in their country made the incident even more uncertain for the Pharma sector.

Nevertheless, the pharmaceutical market managed to meet the sudden peak in the demand for PPE Kits, Drugs, Safety Kits, Masks, Sanitizers and the paramount need to find a cure or a vaccine for it.

Investors, promoters, philanthropists, institutions and governments infused huge amount of funds into these Pharmas for R&D and mass production of safety kits.

The NIFTY Pharma stocks performed as given below:

Captured on TradingView.

The chart shows the percentage return between the start of lock-down in India i.e. 23-03-2020 and 21-07-2020(DD-MM-YYYY). It shows NIFTY Pharma performance in the topmost frame and the top four pharma stocks(by market cap) in the frame below it. On the right is the percentage return in various colour schemes.

It was such that when the entire market fell Pharma came to rise. The following is the price action for 6 months comparing NIFTY and NIFTY PHARMA. As the confirmation for a COVID vaccine is nears you can expect a highly bullish sentiment on Pharma.

Following are the top 5 performers by

Stock %Change in last 3 months Net Profit Qtr Growth YoY %Net Profit QoQ Growth %
Aurobindo Pharma Ltd. 24.18%
48.24%
23%
Biocon Ltd.19.41%
-34.21%
-28.27%
Cipla Ltd.11.86%
-35.14%
 -31.47%
Cadila Healthcare Ltd.6.00% -13.71%
13.47%
Lupin Ltd.4.82%32.35%146.39%
Source:Trendlyne
TABLE 1

You can obtain more fundamental data regarding the stocks given above by clicking here

What can be deduced from the above table(TABLE 1)?

  • Lupin recorded the highest Net Profit Qtr Growth QoQ
  • Whereas, Aurobindo pharma recorded the highest % change in price in the last 3 months. Additionally, it also recorded the highest Net Profit Qtr Growth YoY %

It can be seen that the pharma as a sector overall hasn’t performed well on a YoY basis in terms of profit generation and revenue generation. This could be temporary, yet a very long-lived bubble which was inflated due to uncertainty and volatility in the market surrounded by COVID.

CIPLA rallied when it was announced that it was going to launch its own version of the COVID drug Remdesivir along with its competitor Mylan(Not listed in India).

What are the challenges faced by Pharma?

According to Charu Sehgal, Partner and Leader, Lifesciences and Healthcare, Deloitte India, in an interview with Economic Times, the the industry faces the following issue

  1. Manufacturing units/warehouses not working at full utilisation, due to unavailability of staff.
  2. Non-Availability or disrupted supply of raw materials and packing materials.
  3. Absence of seamless internet data connectivity with staff is creating issues in day to day work.
  4. The marketing staff of pharma companies are having problems generating sales due to lack of logistics and communication channels since they are not able to conduct meetings in-person.
  5. The companies that have operations across the globe are facing issues concerning their operations and staff in those locations. Every country has devised its policies and guidelines.
  6. As with all industries, implementing effective and robust cybersecurity measures is a challenge in the work from home scenario.

What do I take from here?

  1. It is evident that the only entity keeping the pharma market afloat is the COVID-19 Pandemic.
  2. India’s active pharmaceutical ingredient (API) industry is expected to generate $6 billion in revenues by the end of 2020.
  3. India has been meeting more than 20 per cent of the world and almost 50 per cent of the US’s generic drug requirements.
  4. India relies heavily on China for Pharma raw materials, this is about to change after political tensions have given rise to “Aatmanirbhar Bharat” and “Make In India”.
  5. The only major shortfall for the Indian Pharma Market is SCM or Supply Chain Management. Watch out for transport and logistics stocks.
  6. China has been losing credibility and momentum in the global market due to its lack of transparency about the COVID situation in the country.
  7. The Physicians and other doctors were closed so far.The number of surgeries and demand for surgical instruments had reduced. As these avenues open up and the need for other drugs and instrument rises the dependency of Pharma market on COVID shall decrease.
  8. According to Research and Advisory firm Firm Nirmal Bang: In the US, there is a sharp drop in patients visiting physicians, especially in the ophthalmology and dermatology categories, which should have an adverse impact on Sun Pharma and Glenmark
  9. There was also a substantial decline in hospitalization (non-COVID patients), which should affect injectable sales of Aurobindo Pharma and Dr Reddy’s.

Finally, The demand has slumped since clinics all around the country remain slumped, yet the Pharma Benchmark continues to rise. Once a conclusive vaccine is found and till the time it doesn’t saturate the market you can expect quite some price action.

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Market News

What’s up with the IT sector during COVID?

One of the few sectors that didn’t face the wrath of COVID apart from Pharma and Logistics is the IT Sector. Since the IT sector has the advantage of remote work policy, increase digital footprint in the market and e-commerce flourishing the IT sector has outperformed expectations. Let’s have a detailed analysis of the impact of COVID-19 on the IT sector and the opportunities that lie ahead.

How did the IT Sector manage to get back on its feet?

The Government announced a nationwide lockdown on 25th March 2020 across all states in India. The lockdown came as a sudden blow. Since it left many across the nation unemployed, stranded or despaired. The supply chain became dysfunctional. The Law Enforcement across the nation was a hotchpotch. Cash Flows became disrupted as companies across the world defaulted on payments, especially to IT companies where foreign companies outsourced their work to in India. However, this blow was temporary because of the suddenness and uncertainty of COVID.

The IT sector did not take much time to get back on its feet, as the rules for lockdown became more defined, the necessity for eCommerce increased and work-from-home became the norm. Likewise, Meetings and Online classes happened on platforms like Google Meet and Zoom. Moreover, Business communication platforms like Slack gained momentum as well.

Infosys announced in its 39th Annual General Meeting that it was considering a hybrid work-from-home model in the future. Wherein a part of its employees would be working from home permanently and the rest from office.

Colleges and Academic Institutions started investing in online platforms to conduct classes as universities and schools across the globe remained closed. As internet traffic started to increase companies found it necessary to expand their virtual presence. Companies of all sectors all across the world had just one saviour keeping things going , that was the IT sector. Companies started investing in IT Infrastructure to accommodate their increasing online traffic.

How has the IT performed in Q1?

Info Edge (India) Ltd.NIIT Technologies Ltd.MindTree Ltd.TECH MWipro Ltd.
Net Profit QoQ Growth %199.39%-3.35%3.30%-34.71% 2.75%
Net Profit
Quarterly YoY
Growth%
(Between Q1FY20 and Q1FY21)		8.7%13.01%129.77% -37.7% 0.19%

Source:TrendLyne
HCL Technologies Ltd.Infosys Ltd.Larsen & Toubro Info..TCSMphasiS Ltd.
Net Profit QoQ Growth %-7.47%-1.45%-2.60%-12.90% 20.31%
Net Profit
Quarterly YoY
Growth%
(Between Q1FY20 and Q1FY21)		31.61%12.36% 17.06%-13.54% 32.72%
Source:TrendLyne

As expected most players in the IT have declared a decreased quarterly revenue growth(QoQ) and decreased quarterly profit growth(QoQ). This, however, shouldn’t be misinterpreted as the performance for NIFTY YoY is marginally high. Many Force Majeure clauses were triggered which affected the cash flows and balance sheet of many IT players with regards to pending projects.

“We expect Tier-1 IT companies to report a revenue decline in the range of 5-8 per cent QoQ in constant currency (CC) terms. This, coupled with a cross-currency headwind of 30-60 bps, will further negatively impact dollar revenue growth,” said ICICI Securities.

Tech Mahindra, Wipro and HCL Technologies are likely to see around 8-9 percent sequential fall in the topline but L&T Infotech may be best among them as well as midcaps, reporting 4.5-5 percent decline in revenue QoQ, according to MoneyControl.

To sum it up, the IT sector managed to save itself from a greater fall but there was a noticeable loss of revenue and profits.

What is the Good, Bad and Ugly for the IT sector?

Good

  • Work from home means decreased fixed costs
  • Remote work policy promoted by many companies
  • Plenty of potential post-COVID-19 once market recovery begins.
  • COVID has given a boost to E-Commerce bridging the gap between Retailers and Customers.
  • The E-Commerce growth boosts prospects in IT, Logistics, Transport and Auto Industry.
  • Mid Caps hold advantage over Tier 1 IT stocks
  • Atmanirbhar Bharat and Reliance’s 5G announcement leave long term investors pretty optimistic.

Bad

  • As Force Majeure clause implementation increases, there is a lot of credit default and rise in bad debts with respect to minor IT contracts. However, the Tier-1 companies remain safe because of Higher Cash Reserves
  • SMEs are impacted the most due to high credit dependency, reduced sub-contracting demand from foreign companies and leveraged projects are impacted the most.

Ugly

  • Mass Layoffs across the world has shaken the IT industry. Companies like Cognizant made mass layoffs, benching almost 18000 staff in Karnataka.
  • The US H1B visa ban prospects for projects in the US remain bleak.
  • Startups with conventional themes were forced to shut shop.

With this, the future prospects for short and medium-term investments remain volatile. In order to book profits in the market, it is necessary to recognize a suitable entry point. Health agencies across the world are fearing the second wave of coronavirus. However, with the preparation done in the first wave, it can be expected that the second wave may not impact the IT sector after all. Companies have already begun with the human trails of the vaccines. There is substantial optimism that the vaccine might be our very soon. If the vaccine indeed does come out you can expect a fair recovery in broad markets and a rally in the IT Sector as well.