Indian IT companies' credit profile to be stable despite pressure: Icra

Growth of Indian IT services companies is impacted by lower demand led by uncertain macroeconomic environment: Icra

The credit profile of Indian IT services firms is expected to remain stable despite pressure on revenue growth and margins, rating agency Icra said on Thursday.

"Despite pressures on growth and margins over the medium term, free cash flows of Indian IT services companies are expected to remain healthy though there could be moderation in the quantum of such cash flows," Icra said in a statement.

It added that the credit profile of these companies is also supported by net cash position with significant liquidity in the form of surplus investments generated out of past cash flows, despite healthy dividend payout and share buybacks.

"The growth of Indian IT services companies is impacted by lower demand led by uncertain macroeconomic environment, lower deal sizes in digital technologies, cloud adoption and high competitive intensity from local as well as international players," Icra Vice-President Gaurav Jain said.

He added that the Indian IT companies are in the midst of reorienting their business models, focusing more on higher- end services such as IT consulting and emerging technologies (digital).

Indian IT services players' market share of the global IT sourcing market stood at 67 per cent in 2016 compared to 60 per cent in 2012.

"We expect large Indian IT companies to grab a higher share of the digital services space over the next three years," he said.

Jain also said the margins for Indian IT services firms will continue to reflect the challenging operating environment. This includes pricing pressure, wage inflation, higher onsite costs necessitated by visa curbs as well as lower discretionary spend by corporate.

According to Jain, the industry is driving efficiencies through deployment of operating levers like higher share of fixed price contracts, lesser idle resources and automation benefits.

"However, these factors will provide limited cushion leading to overall decline in margins from 23.5 per cent in FY2017 to 21.2 per cent in FY2020-end. The profitability for Indian IT services players remains sensitive to INR depreciation vis-a-vis major currencies such as US dollar, pound and euro...," he added.