Ind-Ra Maintains Stable Outlook on IT Services Sector

India Ratings & Research (Ind-Ra) has maintained a stable outlook on the IT services sector as well as providers for FY16, driven by their steady credit profile and strong liquidity position, with negligible debt.

We expect IT companies' revenue growth to remain stagnant at around 13% in FY16. The growth will be supported by improved business conditions in North America and higher offshoring by clients in the European region to save cost amid weak economic conditions.

Ind-Ra believes clients' spend directed towards 'run the business projects' will increase the proportion of fixed price contracts in the overall mix due to tight budgets. This, along with wage inflation due to annual increments, will stress the margins of Indian IT companies. However, margin erosion could be contained somewhat by improved work force utilisation. Companies which increase the proportion of higher value added services in the nature of consulting and system integration opportunities relating to security and social, mobility and analytics and cloud technologies will be in a better position to maintain margins.

While the Indian rupee is likely to remain stable against the US dollar for FY16, the potential rupee appreciation against other currencies such as the euro and the Great Britain pound can also lead to margin reduction.

The balance sheets of IT companies remain cash rich and can absorb higher dividend payments with ease. Given the strong cash generating ability of these companies, we expect liquidity to remain comfortable in FY16.

The ratings of most Ind-Ra rated IT companies will remain unchanged in FY16 due to their strong liquidity and low debt levels.

What Could Change The Outlook?

Wage inflation compounded by a steady or appreciating rupee and a rise in fixed price contracts are likely to stress profitability. Other key factors that could selectively impact the ratings include large acquisitions which drain out cash or increase financial leverage. Any adverse regulatory development limiting outsourcing ability of the US and European companies will also be negative for the ratings. A significant rupee appreciation can also have a negative impact on the rating as well as outlook.

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