COVID-19 – Impact on the Technology Industry
Updated: Apr 29, 2020
Over the last two months, COVID-19 virus outbreak has created serious disruptions in the industry, affecting the flow of good and services across the world. In this fortnightly, we try and analyse the potential fallout from this pandemic and how this fundamentally changes the way technology services are delivered across the world. We also look at key areas which are expected to undergo significant transformation over the next 12-18 months.
Obviously, the front end of the pandemic is being borne by the Travel & Hospitality industry. So technology companies with significant exposure to these industries are going to feel the most immediate impact.
With all sectors gradually being affected, we expect discretionary spending toward high end technology to decrease substantially in the near term as large enterprises re-think the technology deployments towards more critical services.
Impact on valuations:
The NIFTY IT Index has decreased by over 23% in the last 30 days alone. While the principal reason is, of course, the fears over the spread of COVID-19 and its subsequent disruptions in the industry, it does signal a broader, underlying weakness in the industry.
Over the last 5 years till Dec 2019, the NIFTY IT Index has risen by 40.7%. Industry wide median EV / EBITDA has grown from 11.7x to 13.7x over the same period. However, revenue growth, on a CAGR basis, has been 8.7% and margins have not increased in line with valuations.
In the sub $100m (by revenue) M&A market, transaction multiples have increased from 7-8x EBITDA to 3-4x Revenue. While some of this is genuinely driven by the lack of quality and scaled up businesses, a significant chunk is driven by the expectation of a perpetually expanding economy and discretionary spending.
We expect a meaningful correction in M&A valuation expectations once economic activities resume.
The solution lies in technology:
The solution to a more sustainable, robust economy lies in technology.
In our view, verticals such as Pharmaceutical and Healthcare, which have been lagging behind other verticals such as Retail and CPG in digital transformation, should seize the opportunity to invest heavily in technology solutions to drive patient tracking, preventive care measures, hospital management and drug research.
With people across the world working from home, we believe Telecom solutions will undergo a fundamental change, and this change will stay in the “new-normal”. Conferencing solutions will become more reliable as more people begin using it.
Like the private sector, Governments – especially in South Asian and Middle Eastern countries – need to invest in technology now more than ever. In the US, there has been intense debate on Universal Healthcare coverage and new methods of Healthcare delivery and Insurance coverage to masses. It’s time that Asian countries, which have several times the population of US or Europe, have the same conversation. We expect the technology industry to drive this conversation.