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Growing trend in outsourcing services to drive growth of Indian IT

Increase in outsourcing and digital deals to drive growth of IT sector

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It is expected that the Indian IT services sector will stage a strong recovery this current fiscal, (2021-2022) with an overall revenue growth of 10 to 11 percent. The improvement will ride on increasing outsourcing and accelerating digital transformation services driven by the pandemic, mainly in sectors such as banking, financial services and insurance (BFSI), healthcare, retail and manufacturing. It is expected that the sector will witness higher business levels, and more profitable digital deals will also help Indian IT services players maintain healthy operating margins. This, along with already healthy balance sheets will, in turn, lend a positive bias to the credit profiles of IT service providers as per a recent report by CRISIL based on an analysis of 18 firms, which account for around 70 percent of the IT service sector’s revenues. 

“With customers focusing on optimising costs, outsourcing of IT services is seeing a steady rise globally. The pandemic has opened up additional opportunities in digital services due to a surge in remote working, e-commerce and automated services. Deal wins by Indian IT services players have expanded by 20 percent year on year in fiscal 2021, with 80 percent of these being digital deals across verticals.” remarked Anuj Sethi, Senior Director, CRISIL Ratings. 

As per CRISIL the revenue growth for the Indian IT services industry in fiscal 2022 will be almost 400 basis points (bps) more than the growth of 6 percent last fiscal similar to the 10 percent growth logged over fiscals 2018-2020. However revenue growth across business verticals will vary with the BFSI, accounting for 28 percent of the IT services revenue and will clock 13-14 percent growth this fiscal compared to the 9 percent in fiscal 2021 due to rising share of digital transactions, continued regulatory compliance and data security. 

On the other hand retail and manufacturing, which together account for 30 percent of revenues, are expected to recover 8-9 percent after slowing down to 2-3 percent last fiscal. While the rising number of online retail transactions and client push towards digital marketing will drive growth in retail, manufacturing could witness some pent-up demand from improving industrial activity globally. 

Healthcare, though a small segment accounting for 6 percent of revenues, will sustain its high growth at 15-16 percent due to a higher spending on tackling Covid-19 and increasing adoption of virtual services. Other verticals which contribute balance revenues including oil and gas, communication, aerospace, defence and transportation will see modest growth of 4 percent, while travel and tourism verticals will remain muted this year too, as global travel is not expected to improve significantly.

Experts at CRISIL observe that despite stronger revenue growth, operating margins are unlikely to rise beyond the levels witnessed in fiscal 2021. Even with modest revenue growth of 6 percent, operating margins expanded 200 bps to a seven year high of 25 percent last fiscal, mainly due to cost savings from lower travel, favourable onshore-offshore mix (due to lower onsite roles following the pandemic), and lower attrition levels. 

In the current fiscal (2022) with gradual normalisation of businesses across the globe, a partial reversal of the cost savings logged last fiscal is likely to come. Also, with the expansionary recruitment phase, including maintenance of higher bench strength, employee costs (67 percent of revenues) are expected to rise. IT services players are likely to maintain operating margin at 24-25 percent this fiscal as well, supported by higher growth, increasing share of digital deals and benefits of continued automation.

CRISIL also expects continued improvement in the credit quality of most IT firms, given their lowly leveraged balance sheets and robust liquidity. The sample set of 18 IT firms had an average gearing of 0.13 time and cash surpluses of almost Rs 1.5 lakh crore as of March 31, 2021. However there may be challenges as while the global economy is expected to perform much better in 2021, the recurrence of additional waves of the Covid-19 pandemic in US and Europe, key destinations for IT services, would bear watching.

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