The $100 billion information technology (IT) services sector will achieve revenue growth of 10-11 percent during the current fiscal.
The improvement in IT services companies’ revenue will be backed by increasing outsourcing and accelerating digital transformation services , accentuated by the pandemic, mainly in sectors such as banking, financial services and insurance (BFSI), healthcare, retail and manufacturing, CRISIL Ratings analysis said.
Higher business levels, and more profitable digital deals (~45 percent share in revenues in fiscal 2021, compared with ~40 percent in fiscal 2020) will also help IT services players maintain healthy operating margins.
CRISIL Ratings covers 18 firms, which account for ~70 percent of the IT service sector’s revenue, for the report.
Anuj Sethi, Senior Director, CRISIL Ratings, said: “With customers focussing on optimising costs, outsourcing of IT services is seeing a steady rise globally. The pandemic has opened up additional opportunities in digital services due to surge in remote working, e-commerce and automated services.”
Deal wins by Indian players have expanded by 20 percent on-year in fiscal 2021, with ~80 percent of these being digital deals across verticals.
The revenue growth in fiscal 2022 will be almost 400 basis points (bps) more than the growth of ~6 percent last fiscal and similar to ~10 percent growth logged over fiscals 2018-2020.
Revenue growth across business verticals will vary. BFSI, accounting for ~28 percent of IT service revenue, will clock 13-14 percent growth this fiscal (9 percent in fiscal 2021) due to rising share of digital transactions, continued regulatory compliance and data security.
Retail and manufacturing, which together account for ~30 percent of revenues, are expected to recover 8-9 percent after slowing down to 2-3 percent last fiscal. While the rising number of online retail transactions and client push towards digital marketing will drive growth in retail, manufacturing could witness some pent-up demand from improving industrial activity globally.
Healthcare, though a small segment accounting for ~6 percent of revenues, will sustain its high growth at 15-16 percent, benefitting from higher spending on tackling Covid-19 and increasing adoption of virtual services.
Other verticals including oil & gas, communication, aerospace, defence and transportation will see modest growth of 4 percent, while travel & tourism will remain muted this year too, as global travel is not expected to improve significantly.
Despite stronger revenue growth, operating margins are unlikely to rise beyond the levels witnessed in fiscal 2021. Even with modest revenue growth of ~6 percent, operating margins expanded ~200 bps to a seven year high of 25 percent last fiscal, mainly due to cost savings from lower travel, favourable onshore-offshore mix (due to lower onsite roles following the pandemic), and lower attrition levels.
Rajeswari Karthigeyan, Associate Director, CRISIL Ratings, said: “This fiscal, with normalisation of businesses across the globe, a partial reversal of the cost savings logged last fiscal is likely. With the expansionary recruitment phase, including maintenance of higher bench strength, employee costs (67 percent of revenues) are expected to rise.”
IT players are likely to maintain operating margin at 24-25 percent this fiscal as well, supported by higher growth, increasing share of digital deals and benefits of continued automation.
