IT services firms to see 3% revenue drop in FY21: ICRA

Credit rating agency ICRA has projected a 3% drop in revenues for Indian information technology (IT) services firms for the financial year 2020-2021. 

While supply side constraints were resolved during the quarter, the Covid-19 pandemic has hurt demand, the Mumbai-based financial institution said.

Mumbai-based TCS, the country’s largest software exporter, last week reported a 6% decline in revenue in constant currency for the first quarter of FY21 and said that it expects demand to turn normal in the third quarter. 

ICRA had earlier projected a 6-8% growth for the sector in the current year before the pandemic hit the global economy.

“With the slowdown in growth during the first half of FY21, the margins will also be negatively impacted before a likely recovery in FY22. The companies have managed to overcome supply led challenges through uninterrupted delivery of IT services. However, the challenges on the demand front continue to persist,” Gaurav Jain, vice president of ICRA, said in a statement.

The $190 billion Indian IT industry generates 80% of its revenue from the US and the Eurozone, which is expected to witness GDP contraction of 8.0% and 10.2%, respectively, during the calendar year 2020, according to the International Monetary Fund.

However, dipping margins are a key issue for IT firms when revenues slip. 

“The Indian IT services (firms) are already facing a challenging operating environment, characterised by continued pressure on commoditised IT services, wage inflation and higher onsite costs necessitated by visa curbs as well as lower discretionary spend by corporate,” ICRA said.

According to the report, larger firms with a diversified presence across sectors will manage such headwinds better than mid-size companies, as the latter make a moderately high proportion of their revenue from few sectors. Additionally, the vendor consolidation exercises carried out during Covid-19 benefitted large players as well.

TechCircle recently reported that IT firms are likely to see a topline decline between 5% and 15%, both on a quarter-on-quarter and year-on-year basis, which is unprecedented for the software industry that has consistently grown 8-10% every year for more than a decade and at a much higher rate before that. 

ICRA also noted that the increased digitisation will help IT firms blunt the Covid-19 impact, echoing brokerage firm Motilal Oswal’s recent report. Company chief executives have also pinned their growth hopes on such initiatives from large enterprises.