Digital technologies to drive Indian IT as outsourcing faces price pressures: ICRA

IT industry lobby Nasscom may have refused to predict growth for the upcoming fiscal year for the first time, but rating agency ICRA has forecast that the Indian IT services and consulting industry will grow by 7-9% in dollar terms during the next financial year starting April 2019, it said in a research report.

While demand for IT services will remain stable, visa issues and increased hiring at customer locations (onsite) in the Western markets will put pressure on profitability, the Moody’s-owned rating agency said in the report. It added that currency benefits will mostly compensate for any loss in profitability. These IT firms have created more than 1.1 lakh new jobs during the first nine months of the current financial year.

ICRA took a sample of 13 IT companies to create a trend map for the industry, which grew by 19.4% in the third quarter of 2018-19, while the growth in dollar terms stood at 8.3%, it said in a media statement. The higher growth in rupee terms was because of currency depreciation.

The credit profiles of the largely profitable and debt-free IT firms are not likely to be impacted in 2019-20, ICRA said.

“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 enterprise resource planning applications are increasingly becoming consumer-oriented with the application delivery mechanism shifting to cloud-based environments,” said Gaurav Jain, vice president for corporate ratings at ICRA.

ICRA has found that digital projects, which were earlier small-scale proof of concepts, have been implemented at the larger enterprise level thanks to improved discretionary spending. Such projects will support the future growth of IT companies in the coming fiscal year.

While the banking and financial services sector continued to see some weakness, the insurance vertical supported the overall growth for BFSI, which contributes to 30% of the ICRA sample revenues. With oil prices increasing gradually, the agency predicted higher discretionary spending on digital technologies by energy sector firms. It added that offline retail customers were also expected to increase their technology expenses.

ICRA’s Jain said that the firms are facing pricing pressure, increased regulatory and compliance costs, wage inflation and higher onshore hiring and sub-contracting cost due to visa curbs in the US, the largest market contributing to around 50% of the total sales of IT firms.

“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 a negative impact on the sector outlook,” Jain said in the research report.