Spurt in outsourcing, digital deals to drive IT sector rebound: Crisil

The 100 billion dollar information technology services sector will stage a strong recovery this fiscal with revenue growth of 10 to 11 per cent, according to Crisil Ratings

The 100 billion dollar information technology (IT) services sector will stage a strong recovery this fiscal with revenue growth of 10 to 11 per cent, according to Crisil Ratings.

The improvement will ride on increasing outsourcing and accelerating digital transformation services accentuated by the pandemic mainly in sectors such as banking, financial services and insurance (BFSI), healthcare, retail and manufacturing.Higher business levels and more profitable digital deals (45 per cent share in revenues in fiscal 2021 compared with 40 per cent in fiscal 2020) will also help IT services players maintain healthy operating margins.

This along with already healthy balance sheets will in turn lend a positive bias to the credit profiles of IT service providers.A Crisil Ratings analysis of 18 firms which account for 70 per cent of the IT service sector's revenue indicates as much.Anuj Sethi, Senior Director at Crisil Ratings, said with customers focussing on optimising costs, outsourcing of IT services is seeing a steady rise globally.

"The pandemic has opened up additional opportunities in digital services due to surge in remote working, e-commerce and automated services. Thus deal wins by Indian players have expanded by 20 per cent on-year in fiscal 2021 with 80 per cent of these being digital deals across verticals."The revenue growth in fiscal 2022 will be almost 400 basis points more than the growth of 6 per cent last fiscal and similar to 10 per cent growth logged over fiscals 2018-2020. Revenue growth across business verticals will vary.BFSI accounting for 28 per cent of IT service revenue will clock 13 to 14 per cent growth this fiscal (9 per cent in fiscal 2021) due to rising share of digital transactions, continued regulatory compliance and data security.Retail and manufacturing which together account for 30 per cent of revenues are expected to recover 8 to 9 per cent after slowing down to 2 to 3 per cent last fiscal.

While the rising number of online retail transactions and client push towards digital marketing will drive growth in retail, manufacturing could witness some pent-up demand from improving industrial activity globally.Healthcare, though a small segment accounting for 6 per cent of revenues, will sustain its high growth at 15 to 16 per cent, benefitting from higher spending on tackling Covid-19 and increasing adoption of virtual services.Other verticals (which contribute balance revenues) including oil and gas, communication, aerospace, defence and transportation will see modest growth of 4 per cent while travel and tourism will remain muted this year too as global travel is not expected to improve significantly.Despite stronger revenue growth, operating margins are unlikely to rise beyond the levels witnessed in fiscal 2021.

Even with modest revenue growth of 6 per cent, operating margins expanded 200 basis points to a seven year high of 25 per cent last fiscal, mainly due to cost savings from lower travel, favourable onshore-offshore mix (due to lower onsite roles following the pandemic) and lower attrition levels.