Indian IT sector margins to fall to 21.2% from 23.5% by 2020 – ICRA

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Indian IT companies will continue to struggle to maintain growth rates and their margins will continue to fall in line with the trend seen in the last few quarters, credit rating agency ICRA said.

The rating agency predicted a sharp decline in revenue growth rate from about 17.1% per year in the last five years to “mid-to-high single digits” over the next three years, squeezing profit margins.

Margins for companies such as TCS have fallen by about 2 percentage points in the last couple of years as they have been hit by lower revenue growth.

Operating margins for the 21 companies that it tracks have moderated from 24-25% to 23-24% over the last few quarters, while top line growth has gone from about 17% to about 7%, ICRA said.

“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,” said Gaurav Jain, Vice President of ICRA.

“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.

“The industry is driving efficiencies through deployment of operating levers such as higher share of fixed price contracts, lesser idle resources & automation benefits.

“However these factors will provide limited cushion leading to overall decline in margins from 23.5% in FY2017 to 21.2% in FY2020e,” he added.

The growth of Indian IT Services companies has been 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, Jain said.

On the other hand, growth in the future will be supported by higher spend on digital technologies and continued cost benefits of outsourcing. Last year, he pointed out, the global outsourcing services grew by 6.2%.

Indian IT Services players market share of Global IT Sourcing market stood at 67% in 2016 versus 60% in 2012. “However incremental gains are expected to be at a slower pace,” he said.

“While companies have increased spending on digital technologies and awarding new contracts, the overall IT budgets have moderated leading to lower incremental spends,” he said.

Indian IT Services companies are in the midst of re-orienting their business models focusing more on higher end services such as IT consulting & emerging technologies such as digital.

“They have made considerable progress so far, though 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.

As of now, the IT services 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 (banking and financial services) which contributes 30% of our sample set revenues,” ICRA said.

Manufacturing has also done better than average thanks to automation including internet of things, analytics, optimising supply chain and enhancing distribution channel effectiveness, it added.

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