IT slowdown’s ‘negative trickledown’ effects

Analysts and investors have started to discount the IT slowdown over the past year. The industry has seriously underperformed the overall market. While the Nifty is up by 15.5 per cent in the past 12 months, the Nifty IT index is down 11.5 per cent. The Nifty PE is running at 24plus (weighted free-float average) while the IT Index PE is at 16.5. This is a comedown for an industry used to high double-digit growth and high valuations.

Every IT worker in India supports multiple other industries via consumption and also due to the necessity of support functions for the industry itself. The impact on those sectors has not necessarily been factored in, yet.

Many industries thrive on demand generated by IT workers. Consider for example, the mushrooming of 24x7 eateries in IT hubs. Also think of the carhire industry, which earns steady income by servicing call centres. Plus, there's the IT workers' willingness to spend on trendy clothes, cosmetics, multiplex tickets, high-end holidays, to buy flashy cars and bikes, pay exorbitant rents and take out mortgages, etc.

According to Assocham, rents in IT hubs could ease by 10-20 per cent as the IT/ ITES industry experiences slowdown. If that is true, it's likely that there will also be slowdown in real estate offtake, and mortgage growth could ease up. We've already seen some trouble in ride-hailing companies, like Uber and Ola, as Bengaluru drivers complain about lower incentives. Stagnation in the IT industry could be an unstated, underlying issue here. Entrepreneurs providing transport services to IT/ ITES could also suffer stagnation. There may, at some stage, be lower occupancy in business hotels, in conferencing and in airline passenger growth. Obviously lower consumption could have "negative trickledown" effects.

Industry associations don't usually issue downbeat advisories. So, take these projections from two influential industry associations seriously. If you have exposure to an industry with high dependency of revenue-accrual from IT, consider reducing exposure. Also consider the possibility that the IT industry itself could be due for another bout of valuation-downgrades. That looks to be on the cards now.