Credit Profile Of Indian IT Services Companies To Remain Stable, Says ICRA
The profitability of information technology services companies declined during the first quarter of the current financial year, on account of higher employee expenses especially onsite led by fresh hiring, sub-contracting cost and cross currency movements, rating agency ICRA said.
Employee expense increased to 61.7 percent in the first quarter of fiscal year 2020 from 59.8 percent in Q1 FY19 for ICRA's sample of 13 companies. The operating margin during Q1FY20 remained at 22.6 percent versus 23.3 percent in Q1FY18 and 22.7 percent in Q4FY19.
The share of fixed price contract improved to 58.5 percent in Q1FY20 compared to 57.5 percent in FY18 while employee utilisation levels remained flattish during the same period for sample companies, being two critical factors associated with generating operational efficiencies.
During Q1FY20, ICRA sample companies grew by 10.3 percent in Rupee terms while in dollar terms it grew by approximately 7.4 percent. During the quarter, the Rupee depreciated by 3.7 percent year-on-year versus dollar and appreciated 1.9 percent and 2.1 percent versus GBP/EUR respectively (U.S. and Europe collectively contribute 85 percent of ICRA sample set revenues).
The net employee additions show positive trend with approximately 29,305 additions during Q1FY20 compared to 22,245 in Q4FY19 and 26,782 in Q1FY19, ICRA said.
Vice President Corporate Ratings, ICRA, Gaurav Jain said demand was being driven by scaling up of solutions built around digital technologies (mobility, social, cloud, analytics and automation). The hitherto traditional outsourcing services such as custom application maintenance face pricing pressure and enterprise resource planning applications are increasingly becoming consumer oriented - with application delivery mechanism shifting to cloud based environments, Jain said.
"Adoption of digital technologies has reached inflexion point and is triggering large scale re-architecture programmes," he said.
Among the sectors, banking & financial services continues to see some weakness led by current macro-economic conditions including low interest rates.
The telecom vertical is showing signs of recovery owing to 5G and allied infrastructure development. With the visa issuance norms being tightened by restricting the entry of entry-level programmers, increasing compliance and evidence requirements adding to cost pressures and fewer issuance of H-1B visas, Indian companies have ramped up onshore hiring in the U.S.
Higher onsite hiring is associated with higher wage bills and lower margins. 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, ICRA said.
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 also expects consolidation in the industry especially among small and mid-size players as margin pressure will intensify leading to lower returns for shareholders.
"Geo-Political issues restricting movement of skilled labour or increase in minimum salary requirement will have negative impact on the sector outlook," Jain added.