Indian IT services companies (14 sample companies) have achieved 4.2 percent revenue growth during Q3 FY2018 (8.8 percent in US$ terms) compared to CAGR of 17.1 percent experienced over the FY2013-2017 period and a 9.7 percent growth in fiscal 2017.
The lower growth was due to the INR appreciating by approximately 4 percent versus US$ during the third quarter.
Gaurav Jain, vice president, ICRA, said: “The growth of Indian IT Services companies is 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.”
ICRA says Indian IT Services companies are expected to register compounded annual growth rate (CAGR) in mid-to-high single digits for the period FY2017-2020e.
Higher spend on digital technologies, cost benefit offered through outsourcing model and market share gains will be the growth drivers.
While companies increased spending on digital technologies and awarding new IT contracts, the overall IT budgets have moderated leading to lower incremental spends.
The share of Indian players in global IT sourcing market stood at 67 percent in CY 2016 against 60 percent in CY 2012. ICRA said incremental gains are expected to be at a slower pace.
Indian IT Services companies are in the midst of re-orienting their business models focusing more on higher end services such as IT consulting and emerging technologies such as digital.
“We expect large Indian IT companies to grab a higher share of the digital services space over the next three years,” ICRA said.
Growth in BFS industry 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 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.
IT services industry’s operating margins have moderated from 24-25 percent to 23-24 percent over the last few quarters.
IT Services players are driving efficiencies through deployment of operating levers such as higher share of fixed price contracts, lesser idle resources & automation benefits. However, these factors will provide limited cushion leading to overall decline in margins from 23.5 percent in FY2017 to 21.2 percent in FY2020e.
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.
ICRA said there will be consolidation in the IT services industry especially among small and mid-size players as margin pressure will intensify. Geo-Political issues restricting movement of skilled labour or increase in minimum salary requirement too will have negative impact on the sector outlook.
