IT services growth to return in 2021, Covid to fuel digital spends: Fitch

The Indian IT services sector is expected to return to high single-digit revenue growth in 2021-2022 galvanised by higher demand for digital transformation after a flattish 2020, according to Fitch Ratings.

In a new report titled 'Spotlight: Indian IT Services Sector', Fitch said the impact of the coronavirus pandemic is seen to be only moderate and short term, as customers focus on transforming their businesses digitally, moving services and work platforms online, and minimise spending on legacy services.

Pandemic will accelerate digital IT spends, it said. Most companies have reported robust deal wins that should support growth in 2021-2022, despite the revenue decline in the second quarter of 2020, said the report.

"The Indian IT services sector is likely to resume high single-digit revenue growth in 2021-2022 on higher demand for digital transformation," it said.

Fitch added that it expected the Indian industry to continue to take advantage of its low-cost operations and maintain its strong foothold in the global IT landscape.

"The industry will continue to remain export-driven as it mainly serves US and Europe-based clients. We forecast the industry's revenue to rise by a high single-digit percentage during 2021-2022, after a relatively flat year in 2020," it said.

The industry has seen an average growth rate of about 8 per cent during 2014-2019, it said. The impact from the US ban on new H1B and L1B visa applications is "manageable", it said.

Profitability -- as measured by Earnings Before Interest Tax Depreciation and Amortisation or EBITDA margins -- is likely to remain stable, Fitch report said and added that strong demand for the services, Indian rupee depreciation and cost-control measures, such as salary freezes during downturns, support the stable profitability.

"Shareholder returns that are higher than our expectations are a key risk to the Indian IT services companies' ratings," it said.