BFSI sector may shore up IT services growth in FY21, say brokerage firms

While the $190 billion Indian information technology (IT) services industry could be staring at a washout financial year, the banking, financial services and insurance (BFSI) may offer some succour, multiple brokerage houses said.

As western economies pump billions of dollars in relief as stimulus measures for businesses and individuals through the banking and financial sector, the IT services industry could see increased activity riding on digital solutions capabilities.

"These firms hinted their early investments in digital capabilities were helping customers to continue remotely banking with them, even in the peak of this crisis, as social distancing became the new norm. Most of the firms acknowledged the role of technology/infrastructure investments in enabling remote work at such a large scale and short notice," Motilal Oswal said in a sector report.

According to the Mumbai-based brokerage firm, more than 25% of all new products are provided through digital channels; 33% of sales and up to 70% of all banking transactions now happen digitally. 

It added that banks are making significant investments in areas such as user interface (UI) and artificial intelligence (AI) to provide better personalisation and have accelerated investments in data analytics and automation.

​"Across banks, such as Deutsche Bank (DB), while​ some​ spends are under constant pressure, IT spends are either resilient or showing a robust increase.​ ​Some like US Bancorp are creating a new chief digital office to enhance digital capabilities​ while Citibank and ​Bank of America have been investing in digital initiatives​ for improving​ efficiency​. The resultant cost savings are, in turn, being used to finance incremental investments and growth-driven expenses​," ​the report added.

Last week, Infosys CEO Salil Parekh said that the company expects a rise in demand for cloud solutions and virtualisation of products and services, as a consequence of accelerated remote working among clients. The increase may blunt the impact of the Covid-19 crisis on the IT services company’s topline this financial year.

​The BFSI sector has seen slower growth in the last financial year along with retail. It contributes around one-third of the IT services companies’  revenue. On top of that, some of these big firms have their own captives in India and other countries to run the IT operations as well as for new product development often called as global captive centres (GCC).

"BFSI will continue to grow at 8% because of rising share of digital transactions and the presence of larger and longer-term maintenance contracts that are critical to operations. Healthcare verticals (8% of IT services revenue) would also see similar growth because of rising digital transactions from hospitals," credit rating agency CRISIL said in a report after analysing the books of the top 15 IT firms.

Despite the positives that might come out from the most important sector, IT firms face severe margin pressure even as dollar depreciation reduces the damage that the pandemic is inflicting on these companies. 

For instance, the IT companies' top management has said that several customers are looking to renegotiating existing contracts while some payments are getting delayed. This is apart from a reduction in IT spends as these firm stare at revenue losses since March.

Rajeswari Karthigeyan, associate director with CRISIL ratings said that the impact of slowing revenues will, in turn, affect operating profitability of IT firms despite gains from a depreciating rupee. 

"The IT firms will have to continue investing in new-age technologies to show-case their ability to service complex digital projects. That may not lead to immediate gains. Despite the share of high-value digital revenues quadrupling to 40% between fiscals 2016-20, IT firms saw an almost 100-150 bps decline in operating profitability to 22.7% in fiscal 2020,” Karthigeyan added.

CRISIL said that most clients will focus on mitigating emerging business risks and defer discretionary IT spends while letting existing contracts continue with the current restrictions on people mobility also delaying the consummation of new deals.

Meanwhile, the Donald Trump administration's stoppage of immigration for two months will create another hurdle for IT firms already facing several challenges in gaining H1-B visas.

Currently, Indian IT services firms are the major beneficiary of the H1-B visa programme. The United States Citizenship and Immigration Services (USCIS) issued a total of 3,88,403 H1-B visas during FY2019 (October 2018 to September 2019 period) including fresh and renewals of which share of India stood 71.7%.

“If the proposed changes impact the existing H1-B visas including renewals thereof, the impact on the Indian IT services is expected to be material," credit rating agency ICRA said in a report adding that the likelihood of same is low as it will disrupt the existing services offered by Indian IT services companies and could eventually be detrimental to US economy in the long run.

While the top IT firms are confident of the economic situation getting normal by the second half of the fiscal, analysts are expecting the current fiscal to be a washout as large economies continue to struggle to control the spread of virus even into the last week of April.