Despite the pressure on growth and margins, the credit profile of Indian IT services companies is expected to remain stable, underpinned by its ability to sustain free cash flows, it said.Press Trust of India
The Indian IT services sector is expected to register a growth of 6-8 per cent in US dollar terms during 2019-20, according to ratings agency ICRA.
Indian IT firms could also see higher wage bills and lower margins on account of increased onsite hiring as they tackle tighter visa scrutiny and reduction in H1-B visa approvals.
"As per available trends, ICRA sample set (13 companies) grew by 16.8 per cent in INR terms, while in US dollar terms, it grew by 7.5 per cent during FY2019... The Indian IT services sector is expected to register growth of 6-8 per cent in US dollar during FY2020," ICRA said in a statement.
It added that despite currency benefits as well as use of operating levers, the profitability has remained flattish in 2018-19 at 22.5 percent.
This, ICRA said, was on account of higher onsite hiring and sub-contracting cost necessitated by visa curbs, pricing pressure, increased regulatory costs and wage inflation.
The agency said increasing compliance and evidence requirements are adding to cost pressures, and coupled with fewer issuance of H-1B visas, Indian companies have ramped up onshore hiring in the US.
"As per ICRA research, this will culminate into approximately 10 percent reduction in H1-B visa approvals for regular applicants...This will lead to higher onsite hiring which is associated with higher wage bills and lower margins," it pointed out.
The overall margins are estimated to decline from 22.5 percent in 2018-19 to 21.5 percent in 2019-20 (estimate) for ICRA sample companies, it added.
Despite the pressure on growth and margins, the credit profile of Indian IT services companies is expected to remain stable, underpinned by its ability to sustain free cash flows, it said.
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 despite healthy dividend payout and share buybacks.
Gaurav Jain, Vice President, Corporate Ratings, ICRA said the agency also expects consolidation in the industry, especially among small and mid-sized players, over the next decade.
He noted that geo-political issues restricting movement of skilled labour or increase in minimum salary requirement will have negative impact on the sector outlook.
Demand is being driven by scaling up of solutions built around digital technologies (mobility, social, cloud, analytics and automation), he added.