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Accelerated digitisation augurs well for IT services industry: ICRA

Domestic IT services companies are having a good run and their US$ revenue growth of is expected to be around 9-12% in FY2022, driven by accelerated and robust demand for digital technologies from enterprises globally; and partly on low base of last year due to Covid-19 impact. Industry growth though, is expected to moderate marginally to 6-9% in FY2023 partly also on account of the base effect. Carrying forward the momentum from recent quarters, ICRA’s sample of 13 IT companies recorded revenue growth of 17.6% in INR terms and 17.3% in US$ terms in Q2 FY2022. The INR appreciated by ~1.0% vis a vis Euro on a Y-o-Y basis which moderated INR growth to some extent during the quarter. However, with normalisation in operational overheads as work-from-office has resumed partially and some pricing pressure on commoditised services, operating margins have seen some moderation in H1 FY2022. Notwithstanding the same, margins are expected to remain healthy between 22-24% over the medium term.

Commenting on the trends, Deepak Jotwani, Assistant Vice President & Sector Head, ICRA, says, “In line with the growth trajectory witnessed over recent quarters, Indian IT services companies are expected to report healthy growth over the near term due to aforementioned favourable factors. This growth has been supported by uptick in all key verticals such as BFSI, telecom, manufacturing, retail and distribution. However concerns have emanated from elevated attrition levels for the industry due to strong demand for digital technologies lack of adequate skilled manpower to service the same Companies are reskilling employees to overcome this challenge. Moreover they have also been able to achieve higher employee productivity through increased deployment of technology. Hiring by IT companies is at an all-time high buoyed by strong demand and net addition over past four quarters has been increasing exponentially.”

Moreover IT services companies remain focused on enhancing the share of fixed price contracts as it assures better revenue visibility and also allows for higher deployment of offshore resources where the salaries are 60-70% lower coupled with better utilisation of manpower across such projects and deployment of automation. The benefits are shared with the client leading to mutual advantage. The share of fixed price contracts has remained between 60-65% over the past 3 years,. There was some increase in H2 FY2021, which has tapered to ~61% levels in Q2 FY2022 given the higher share of new contracts and mix of contracts secured.

“ICRA has a Stable outlook on the Indian IT services industry, led by minimal impact of the pandemic on revenues and profitability and steady earnings outlook over the near to medium term,” Jotwani added.

CT Bureau

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