Revenue growth in the $97 billion Indian information technology (IT) service industry will be 0-2 percent in fiscal 2021 due to the impact of the Covid-19 pandemic world-wide.
CRISIL Ratings said today analysing the revenue growth of 15 large IT firms, accounting for almost 70 percent of the IT service sector’s revenues.
The IT firms also face the spectre of price renegotiations by clients, which would add to the cost pressure emanating from investments in digital capabilities and limited incremental cost-saving avenues.
Operating profitability could also moderate ~200-250 basis points to a decadal low of ~20 percent this fiscal.
“Typically, new deals get finalised between March and May, but this time around, most clients will focus on mitigating emerging business risks and defer discretionary IT spend, while letting existing contracts continue. The current restrictions on people mobility will also delay consummation of new deals,” Anuj Sethi, senior director of CRISIL Ratings, said.
The banking, financial services and insurance (BFSI), which accounts for 28 percent of IT service revenues, will continue to grow at ~8 percent because of rising share of digital transactions and presence of larger and longer-term maintenance contracts that are critical to operations.
Healthcare verticals, which contribute 8 percent of IT services revenue, will achieve 8 percent growth because of rising digital transactions from hospitals.
Large verticals such as manufacturing, travel and tourism, oil and energy, and retail, which contribute 32 percent of IT service revenues, will be spending less on IT services.
Communication, aerospace, defence and transportation, which contribute 22 percent of IT service revenues, will also lower spending on IT services.
“The impact of slowing revenues will affect operating profitability despite gains from a depreciating rupee. That is because IT firms will have to continue investing in new-age technologies to show-case their ability to service complex digital projects,” Rajeswari Karthigeyan, associate director of CRISIL Ratings, said.
Digital revenues quadrupled to ~40 percent between fiscals 2016-20. IT firms saw an almost 100-150 bps decline in operating profitability to 22.7 percent in fiscal 2020.
IT firms have already streamlined costs and raised utilisation rates to peak levels of 85-90 percent in recent years by increasing the share of fixed-price contracts.
