Re appreciation affecting IT companies: Icra

Domestic ratings agency Icra today said the appreciation in the rupee is aggravating the troubles of the Indian IT sector, which is already hit by a change in the market landscape and compressing revenue growth.
It said the industry is already reeling under pressures like uncertain macro-economic environment, lower deal sizes in digital technologies, cloud adoption and high competitive intensity.
The agency said despite a 8.1 per cent growth in USD revenue, IT players have registered a growth of only three per cent in the second quarter of the current fiscal, due to the rupee appreciation of four per cent during the quarter.

Due to the difficulties on the currency front, the agency said the USD 160-billion industry will be able to notch a mid-to-high single digit growth till FY20.
On margins, it said the industry should brace for an impact on margins as price led competition is likely to intensify and will negatively impact the spreads.
"IT Services players profitability also remains sensitive to rupee depreciation vis-a-vis major currencies such as USD, GBP and Euro and the same too will have an impact," it said.

Its vice president Gaurav Jain said future growth will be supported by higher spend on digital technologies, continued cost benefit offered through outsourcing model and market share gains for the Indian IT sector.

"While companies have increased spending on digital technologies and awarding new contracts, the overall IT budgets have moderated leading to lower incremental spends," he said.
He, however, warned that an increase in the global IT market, which moved up to 67 per cent in 2016 from 60 per cent in 2012, will be limited as Indian IT Services companies, which are in the midst of re-orienting their business models focusing more on higher end services such as IT consulting and digital, are lagging behind competition.
"We expect large Indian IT companies to grab a higher share of the digital services space over the next three years," he said.

From a vertical standpoint, manufacturing is outperforming with a 5.8 per cent growth but the largest revenue contributor of banking and financial services has shown a muted trend over the last few quarters on macroeconomic conditions including factors like Brexit.
Over the next decade, the agency expects consolidation in the sector due to the margin pressures.
The rating agency, however, said that despite the pressures on on growth and profitability, credit profile for the sector will remain stable.