Credit profile of Indian IT Services companies to remain stable, says ICRA

ANI | Updated: Oct 26, 2017 18:12 IST

New Delhi [India], Oct. 26 (ANI): Credit rating agency ICRA has highlighted that the credit profile of Indian IT Services companies is likely to remain stable underpinned by its ability to sustain free cash flows despite pressure on revenue growth and margins.

As per a report issued by the agency, the aggregate operating margin sample set at 23.5 percent for FY 2017, coupled with moderate capex (organic as well as inorganic) and working capital requirements, the free cash flows have remained robust historically, the report states.

It added that despite pressures on growth and margins over the medium term, free cash flows of Indian IT services companies is expected to remain healthy.

"The growth of Indian IT Services companies is impacted by lower demand led by uncertain macro-economic environment, lower deal sizes in digital technologies, cloud adoption and high competitive intensity from local as well as international players," said vice president ICRA, Gaurav Jain.

Highlighting that growth will be supported by higher spend on digital technologies, Gaurav said that the cost benefits offered through outsourcing models will reflect growth of 6.2 percent of Global IT Services outsourcing market and market share gains as per CY2016.

"While companies have increased spending on digital technologies and awarding new contracts, the overall IT budgets have moderated leading to lower incremental spends," added Gaurav.

Hailing the Indian IT Services companies, he also said that the companies are on the path of re-orienting their business models focusing more on higher end services such as IT consulting and emerging technologies (digital).

"Even after making considerable progress so far, they still lag behind international peers. We expect large Indian IT companies to grab a higher share of the digital services space over the next three years," he added.

In terms of verticals, BFS growth is muted over the last few quarters. Demand for the sector has been adversely impacted by current macroeconomic conditions impacting the industry including sustained low interest rates and weakening of British Pound due to result of Brexit referendum.

The business is supported by digitization efforts, cost optimization, regulatory, compliance and security driven initiatives. The Insurance sector has seen good growth and is supporting the overall growth for BFSI which contributes 30 percent of our sample set revenues.

The Indian IT Services industry operating margins have moderated from 24-25 percent to 23-24 percent over the last few quarters though remain healthy.

"The margins for the Indian IT Services companies will continue to reflect the challenging operating environment characterised by pricing pressure on commoditised IT services, wage inflation, higher onsite costs necessitated by visa curbs as well as lower discretionary spend by corporate. Several IT Services players, both local and international, chasing limited new opportunities will intensify price led competition and will have a negative bearing on the margins of Indian IT Services players," he added.

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.

Overall, the credit profile is expected to remain stable over the medium term led by IT Services companies to sustain free cash flows despite pressure on growth and margins though geo-political issues restricting movement of skilled labour or increase in minimum salary requirement will have negative impact on the sector outlook. (ANI)