Growth for IT services industry to accelerate in FY2022 as digital deal outsourcing picks up; however, profit margins to moderate owing to wage inflation: ICRA
Growth
for IT services industry to accelerate in FY2022 as digital deal outsourcing
picks up; however, profit margins to moderate owing to wage inflation: ICRA
·
With strong demand for digital technologies resulting
in higher award of contracts, ICRA expects the US$ revenue growth for ICRA
sample of IT services companies to be around 9-12% in FY2022, while growth in
FY2023 will be around 6-9%
·
OPM improved
in FY2021 owing to lower overheads and higher offshoring; OPM to moderate in
FY2022-FY2023 owing to wage inflation and gradual resumption of work
The US$ revenue growth of ICRA’s
sample of IT services companies is expected to be around 9-12% in FY2022,
driven by robust demand for digital technologies resulting in
higher awards of contracts. Further,
the growth in FY2022 will be supported by pent up demand of FY2021,
which was lower due to the initial impact of Covid-19. For FY2023, the ratings agency estimates
the growth to be around 6-9%.
In Q1 FY2022, the ICRA sample of
eight companies recorded a revenue growth of 18.1% in INR terms and 16.2% in
US$ terms, primarily led by low base of last year (Covid-19 impact) and
acceleration of digital outsourcing deals amid the pandemic. The rupee
appreciated by 2.8% vis-a-vis the US dollar on a Y-o-Y basis, which negatively
impacted the revenue growth of IT services companies in rupee terms in Q1
FY2022. In FY2021, the sample of 13
companies witnessed a Y-o-Y growth of 5.9% in revenues in rupee terms and 0.6%
in US dollar terms, impacted by the pandemic. In
FY2021, the rupee depreciated by approximately 4.7%/7.7%/9.8% Y-o-Y vis-a-vis
the US$/GBP/EURO, respectively, which supported the growth in rupee terms.
Based on the trends, Mr.
Gaurav Jain, Vice President & Sector Head, ICRA, said, “IT services companies have managed to overcome supply-led
challenges through uninterrupted delivery of IT services, through the
work-from-home model. As a silver lining, the pandemic is accelerating the
secular trends of core modernisation, usage of collaborative technologies and
cloud migration as companies shift to digital business models to pursue
work-from-home model, which will benefit the IT services companies. In H1 CY2021
(January-June 2021), traditional sourcing witnessed annual contract value (ACV)
of US$15.2 billion, up by ~15% on a Y-o-Y basis, owing to accelerated demand
for digital technologies. Enterprises have shifted to virtual models that have
pushed the acceleration of digital outsourcing deals. Further, risks related to
H-1B visas issuances have slightly abated with the election of the new US
administration in February 2021. Several proposed changes with respect to visa
eligibility, wage levels and selection procedures have been put on hold for
further review or deferred or vacated by the court.”
In Q1 FY2022, the operating profit
margin (OPM) for the ICRA sample set (comprising eight companies) was 24.9%,
lower than 25.6% in Q1 FY2021, impacted by wage inflation. The OPM in FY2021
(sample of 13 companies) at 24.2% (22.7% in FY2020) remained supported by
depreciation of the rupee against the US dollar and lower overheads owing to
the pandemic.
The improvement in OPM witnessed in FY2021 is unlikely to sustain going
forward owing to wage inflation, pricing pressure on legacy services and
gradual resumption of normal office working and travel compared to
work-from-home options seen during FY2021. ICRA expects the OPM for its sample
set to taper off to 23.0% in FY2022 and 22.5% in FY2023. Despite lower OPM
compared to FY2021, it is expected to remain healthy.
“ICRA has a Stable outlook on the Indian
IT services industry, underpinned by its ability to generate healthy free cash
flows, it also expects the companies to
distribute 75-85% of their profits in the form of dividend and share buybacks,
in line with the past few years’ trends,” Mr. Jain added.
For further
information, please contact:
Media Contacts: |
||
Naznin Prodhani Head Media & Communications ICRA Ltd Tel: + (91 124) 4545300, Dir - 4545860 |
Shreya Bothra Manager
- Media & Communications ICRA
Ltd Tel: +91 98109 34940 |
Poornima Tyagi Deputy Manager- Media &Communications ICRA Ltd Tel: +(91-124)4545300, Ext: 840 |
Girish Dikey/ Khushal Devera Ketchum Sampark Mob: 7738020260/ 9819666376 Email:girish.dikey@ketchumsampark.com; khushal.devera@ketchumsampark.com |
||
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