Indian IT Services companies grew 3.0 percent during Q2FY2018 (8.1 percent in US$ terms) compared to a CAGR of 17.1 percent experienced over the FY2013-2017 period and a 9.7 percent growth in last fiscal, FY2017, says a new report from ICRA.
The lower growth was due to the INR appreciating by approximately 4.0 percent versus US$ during the quarter.
As per an ICRA note based on the profiles of 14 sample companies, Indian IT Services companies are expected to register compounded annual growth rate (CAGR) in mid-to-high single digits for the period FY2017-2020e.
The growth was impacted by lower demand led by uncertain macro-economic environment, lower deal sizes in digital technologies, cloud adoption and high competitive intensity from local as well as international players, said Gaurav Jain, vice president, ICRA.
Future growth will be supported by higher spend on digital technologies, continued cost benefit offered through outsourcing model and market share gains.
While companies have increased their spending on digital technologies and awarding new contracts, the overall IT budgets have moderated leading to lower incremental spends, the report said.
The share of Indian players in Global IT Sourcing market stood at 67 percent in CY2016 (60 percent in CY2012), however incremental gains are expected to be at a slower pace. These companies are reshaping their business models to deliver high-end services such as IT consulting and emerging digital technologies.
Among the verticals, BFS growth has been muted over the last few quarters. Demand for the sector has been adversely impacted by current macroeconomic conditions impacting the industry including sustained low interest rates and weakening of British Pound as a result of Brexit referendum, the report said. However, the business is supported by digitization efforts, cost optimization, regulatory, compliance and security driven initiatives.
The Insurance sector has seen good growth and is supporting the overall growth for BFSI which contributes 30 percent of ICRA’s sample set revenues.
The Manufacturing verticals (17 percent of ICRA sample set revenues) outperformed other key verticals with 5.8 percent growth in Q1FY2018 and 3.6 percent in Q2FY2018 led by automation including internet of things, analytics, optimising supply chain and enhancing distribution channel effectiveness.
As for margins, industry’s operating margins have moderated from 24-25 percent to 23-24 percent over the last few quarters. Says Jain, “ the trend reflects the challenging operating environment characterised by pricing pressure on commoditised IT services, wage inflation, higher onsite costs necessitated by visa curbs as well as lower discretionary spend by corporate.”
IT Services players profitability also remains sensitive to INR depreciation vis-a- vis major currencies such as US$, GBP and EURO and the same too will have an impact, the report finds.
The credit profile of Indian IT Services companies is expected to remain stable underpinned by its ability to sustain free cash flows despite pressure on revenue growth and margins.
With aggregate operating margins of ICRA sample set at 23.5 percent for FY2017 and 23.0 percent for H1FY2018 coupled with moderate capex (organic as well as inorganic) and working capital requirements, the free cash flows have remained robust historically.