ICRA: Demand environment for Indian IT Services Industry to remain stable

By : |March 18, 2019 0
The Indian IT Services sector is expected register growth of 7-9% in US$ during FY2020.

The Indian IT Services sector is expected register growth of 7-9% in US$ during FY2020. As per available trends, ICRA sample set (13 companies) grew by 19.4% in INR terms while in US$ terms it grew by 8.3% during Q3 FY2019. In the same period (quarter) the INR depreciated by approximately 11.4%/8.9%/8.0% versus US$/GBP/EURO respectively (US and Europe collectively contribute 85% of sample set revenues) respectively leading to higher INR growth. During 9mFY2019, these companies have grown by 16.4% in INR terms and 8.8% in US$ terms.

Further, companies have reported higher deal wins during the quarter while net employee addition has increased during the 9mFY2019 period across majority of our sample companies, being signs of stable demand environment for IT Services sector. The net employee additions show positive trend with approximately 110,000 additions during 9mFY2019 alone compared to 11,600 during FY2018 and 93,500 people added in FY2017.

Says Mr. Gaurav Jain, Vice President – Corporate Ratings, ICRA, “Demand is being driven by solutions built around Digital technologies (Mobility, Social, Cloud, Analytics and Automation) while traditional outsourcing services such as Custom Application maintenance face pricing pressure and ERP (Enterprise resource planning) applications are increasingly becoming consumer oriented with application delivery mechanism shifting to cloud based environments. The earlier small-scale proof of concept digital projects has started evolving into enterprise level larger implementations coupled with improvement in discretionary spend supporting future growth.”

                                 

___________________________________________________________________________________________________________

Among the sectors, Banking & Financial Services continues to see some weakness led by current macro-economic conditions including low interest rates; continued focus on cost optimization, managing their discretionary spends as well as insourcing by few clients for want of greater control though Insurance vertical is supporting the overall growth for BFSI which contributes 30% of the ICRA sample revenues. With firming up of oil prices resulting in higher discretionary spends for digital technologies, ICRA expects the Energy vertical to perform better compared to previous few years. Retail vertical grew healthy during 9mFY2019 compared to flattish growth in FY2018 supported by improved consumer sentiments and higher discretionary brick mortar retail demand.

Despite the currency benefits as well as use of operating levers, the profitability has remained flattish in Q3FY2019 at 23.0% on account of pricing pressure, increased regulatory costs, wage inflation and higher onshore hiring & sub-contracting cost necessitated by visa curbs. The share of fixed price contract improved to 55.7% Q3FY2019 compared to 54.5% in Q3FY2018 while employee utilisation levels remained flattish during the same period for sample companies, being two critical factors associated with generating operational efficiencies.

With the visa issuance norms being tightened by restricting the entry of entry-level programmers coupled with increasing compliance and evidence requirements adding to cost pressures, Indian companies have started to ramp up onshore hiring in USA. USCIS has significantly increased the Request for Evidence (RFE) before issuing H1-B visas leading to higher compliance costs. During the three-month period ending December 2018, 60% of all completed H-1B cases had been issued RFEs. This is significant, considering that only 38% of all completed H-1B applications received RFEs during fiscal 2018 (12-month period ending September 30, 2018) and 21.4% in the previous fiscal.

Further, the recent amendment (to be implemented from April 1, 2019) by USCIS (United States Citizenship and Immigration Services) reversing the process for H1-B selection favouring advance degree holders will have an adverse financial impact on the Indian IT Services Companies. As per ICRA research, this will culminate into approximately 10.0% reduction in H1-B visa approvals for regular applicants (Applicant without advance degree – master’s or higher from US universities) which form major part of the H1-B visa requirements of Indian IT Services Companies. This will lead to higher onsite hiring which is associated with higher wage bills and lower margins. The overall margins are estimated to decline from 22.5% in FY2018 to 20.8% in FY2021e for sample companies.

Despite pressure on growth and margins, the credit profile of Indian IT Services companies is expected to remain stable underpinned by its ability to sustain free cash flows. The credit profile is also supported by net cash position with significant liquidity in the form of surplus investments generated out of past cash flows despite healthy dividend payout and share buybacks.

“Over the next decade, ICRA also expects consolidation in the industry especially among small and mid-size players as margin pressure will intensify leading to lower returns for shareholders. Geo-Political issues restricting movement of skilled labour or increase in minimum salary requirement will have negative impact on the sector outlook,” adds Mr. Jain.

No Comments so fars

Jump into a conversation

No Comments Yet!

You can be the one to start a conversation.