Rating agency ICRA on Tuesday said growth of IT services companies is expected to remain in 6-8 per cent range in US dollar terms in 2019-20, even as the profitability of these firms declined in the first quarter on account of higher employee expenses.
The profitability of IT services companies declined during Q1 2019-20, on account of higher employee expenses, especially onsite, led by fresh hiring, sub-contracting cost and cross currency movements, ICRA said in a statement.
Employee expense increased to 61.7 per cent in the first quarter of 2019-20 from 59.8 per cent in the year-ago period for ICRA's sample of 13 companies, it added.
"During Q1FY2020, ICRA sample companies grew by 10.3 per cent in INR terms while in $ terms, it grew by approximately 7.4 per cent. During the quarter, INR depreciated by 3.7 per cent year-on-year versus $ and appreciated 1.9 per cent and 2.1 per cent versus GBP/EUR, respectively," it said.
The US and Europe collectively contribute 85 per cent of ICRA's sample set revenues.
"FY2020 IT services growth to remain at 6-8 per cent USD (terms)," it noted.
Demand is being driven by scaling up of solutions built around digital technologies (mobility, social, cloud, analytics and automation), ICRA Vice President(Corporate Ratings) Gaurav Jain said.
"The hitherto traditional outsourcing services such as custom application maintenance face pricing pressure and ERP (enterprise resource planning) applications are increasingly becoming consumer oriented - with application delivery mechanism shifting to cloud based environments," he added.
Adoption of digital technologies has reached inflexion point and is triggering large scale re-architecture programs, he explained.
"Despite pressure on growth and margins, the credit profile of Indian IT services companies is expected to remain stable underpinned by its ability to sustain free cash flows. The credit profile is also supported by net cash position with significant liquidity in the form of surplus investments generated out of past cash flows," it said.
Over the next decade, ICRA expects consolidation in the industry, especially among small and mid-size players, as margin pressure will intensify leading to lower returns for shareholders, Jain said.
"Geo-political issues restricting movement of skilled labour or increase in minimum salary requirement will have negative impact on the sector outlook," he added.