Investment information and credit rating agency ICRA has forecast a lower compounded annual growth rate (CAGR) of 9-12 per cent for the Indian IT services industry during 2018-21, way lower than the 17.1 per cent it registered during 2013-17.
It attributed the likely lower growth rates to the lower deal sizes in digital technologies, cloud adoption and high competitive intensity from local as well as international players.
“While companies have increased spending on digital technologies and awarding new contracts, the overall IT budgets have moderated, leading to lower incremental spends,” it pointed out.
“The IT services companies are re-orienting their business models, focusing more on high-end services such as IT consulting and emerging technologies such as digital and have made considerable progress so far, though it currently lags international peers,” it said.
Credit profile
ICRA, however, has forecast a stable credit profile for the IT services industry in the country.
“The credit profile of Indian IT services companies remain stable, underpinned by its ability to sustain free cash flows despite pressure on revenue growth and margins,” ICRA said, giving a forecast for the industry.
ICRA said most of the large IT services companies might maintain high dividend pay-outs and share buybacks, as there are limited avenues for fund deployment.
“The investment requirements (organic and inorganic) for Indian IT services in the past have been moderate, relative to internal cash-flow generation. Majority of the acquisitions done by Indian IT services players have been to acquire competencies rather than achieve scale and size,” it pointed out.
With aggregate operating margins of ICRA’s sample set at 22.5 per cent for the financial year 2018, coupled with moderate capital expenditure and working capital requirements, free cash flows have remained robust historically.
“Despite pressures on growth and margins over the medium term, these factors are unlikely to impact the free cash flow generation ability of the IT services companies, though there could be moderation in the quantum of such cash flows,” it felt.
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.
“Our sample set (13 leading Indian companies) reported surplus liquidity (net of debt) of about Rs 1,60,000 crore by March 2018, despite healthy dividend pay-out of approximately 30 per cent (Rs 20,600 billion), in addition to share buybacks (Rs 73 billion),” it said.