Outlook on Indian IT Services companies

Indian IT Services companies are expected to achieve CAGR of around 9-12 percent during FY2018-2021 compared to CAGR of 17.1 percent during FY2013-2017 period, ICRA said.

Margins of Indian IT Services companies will be supported by factors such as ability to modify cost structure with rational and variable salaries couples with gradual reduction of high cost resources.

Besides deployment of operating levers such as higher share of fixed price contracts, lesser idle resources and automation benefits will also help manage costs. However, these factors will provide limited cushion leading to overall decline in operating margins from 22.1 percent in FY2018 to 20.8 percent in FY2021 for ICRA sample of 13 leading companies.

ICRA said it has a stable outlook on Indian IT Services industry. The credit profile of Indian IT Services companies remains 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 22.5 percent for FY2018 coupled with moderate capex (organic as well as inorganic) and working capital requirements, the free cash flows have remained robust historically.

Despite pressures on growth and margins over the medium term, these factors are unlikely to impact the free cash flow generation ability of Indian IT Services companies though there could be moderation in the quantum of such 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. Our sample set (13 leading Indian companies) reported surplus liquidity (net of debt) of approximately Rs. 1,600 billion March 2018 despite healthy dividend pay-out of approximately 30 percent (Rs. 206 billion) in addition to share buybacks (Rs. 73 billion).

ICRA said the investment requirements (organic and inorganic) for Indian IT Services in the past have been moderate relative to internal cash flow generation. Majority of the acquisitions done by Indian IT Services players have been to acquire competencies rather than achieve scale and size.

The growth of Indian IT Services companies will be impacted by lower deal sizes in digital technologies, cloud adoption and high competitive intensity from local as well as international players.

Companies have increased spending on digital technologies and awarding new contracts. The overall IT budgets have moderated leading to lower incremental spends.

Indian IT Services companies are re-orienting their business models focusing more on high end services such as IT consulting and emerging digital technologies, though they currently lag international peers.

Meanwhile, the Indian IT industry is expected to add around 2.5 lakh new jobs in 2019, said staffing firm TeamLease.

“Some of the areas wherein positive growth in hiring is expected are computer, mathematical, architecture and engineering-related fields. By 2020, about 2 million job additions are anticipated worldwide of which 13 per cent increase will be in India itself,” said Alka Dhingra, general manager, TeamLease Services.

Salaries in India are projected to rise by 10 percent to 13 percent in 2019, same as the actual increase in 2018.

The highest paid technology areas are going to be big data analytics, machine learning and AI developers.

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