Indian IT services’ revenue growth will slow down to 8-9 percent in fiscal 2017, lower than the 10-12 percent guidance given by industry lobby Nasscom, India Ratings today said. “We expect the sector’s revenue growth to taper down to 8-9 percent in FY17 on the back of flat-to-marginally negative IT budgets of clients,” it said in a note. The agency’s estimate is lower than the 10-12 percent guidance for the entire sector given by Nasscom earlier this month. Also Read - 11th India Game Developers Conference scheduled for November 22Also Read - Why Indian engineers are missing the mark for the jobs they set out to pursue
It is also lower than the 12.3 percent growth rate, the industry is set to achieve in FY16. It said the increasing cost reduction expectations due to automation of a large part of traditional services would result in lower budgets for the ‘run the business’ projects. Also Read - Reliance Jio, Paytm advocate increased regulation of messages on OTT platforms
As for the ‘change the business’ projects, the rating agency said budgetary allocations for them as well remain small as clients run pilot programmes to figure out which digital solutions would work best.
The rating agency gave a “stable outlook” to IT services sector on steady credit profiles and strong liquidity positions with negligible debts. It said a stronger US Dollar will impact the profitability of North American companies, increasing their sensitivity to the cost of their ‘run the business’ projects, it said.
The agency added that demand from European regions is likely to show a positive bias due to a weaker euro. The pre-tax profit margins for the IT companies will be in the range of 22-23 percent in FY17, which is lower than the 24.5 percent achieved by companies in the calendar year 2015.
The margins will be impacted by wage inflation and a higher proportion of commoditized offerings being converted into fixed-price contracts due to increased competitiveness. Even though it gave a stable outlook, India Ratings said cash drains due to large acquisitions or dividend pay-out or share buyback could impact the credit profiles of IT companies.