IT services industry growth to accelerate in FY22, profit margins to moderate: ICRA

By: |
August 03, 2021 8:05 PM

The growth in the financial year 2021-22 will be supported by the pent-up demand of the financial year 2020-21 that was lower due to the initial impact of COVID-19.

IT services industry, IT industry news, IT services newsRBI had informed all banks last month that retailers and wholesale traders would be allowed to register on Udyam Registration portal. (Representative image)

IT services companies are expected to see growth in revenue, driven by robust demand for digital technologies resulting in higher awards of contracts, according to ratings agency ICRA. Further, the growth in the financial year 2021-22 will be supported by the pent-up demand of the financial year 2020-21 that was lower due to the initial impact of COVID-19.

Gaurav Jain, Vice President and Sector Head at ICRA, said IT services companies have managed to overcome supply-led challenges through uninterrupted delivery of services through the work-from-home model.

“As a silver lining, the pandemic is accelerating the secular trends of core modernisation, usage of collaborative technologies, and cloud migration as companies shift to digital business models to pursue work-from-home models, which will benefit the IT services companies,” he added.

In January-June 2021, traditional sourcing witnessed an annual contract value (ACV) of USD 15.2 billion, up by about 15 per cent on a year-on-year basis, owing to accelerated demand for digital technologies, Jain said.

“Enterprises have shifted to virtual models that have pushed the acceleration of digital outsourcing deals. Further, risks related to H-1B visa issuances have slightly abated with the election of the new US administration in February 2021. Several proposed changes with respect to visa eligibility, wage levels, and selection procedures have been put on hold for further review or deferred or vacated by the court, he added.

ICRA noted that the improvement in OPM (operating profit margin) witnessed in the financial year 2020-21 is unlikely to sustain going forward owing to wage inflation, pricing pressure on legacy services, and gradual resumption of normal office working and travel compared to work-from-home options seen during the financial year 2020-21.

Despite lower OPM compared to FY2021, it is expected to remain healthy, it added. “ICRA has a Stable outlook on the Indian IT services industry, underpinned by its ability to generate healthy free cash flows, it also expects the companies to distribute 75-85 per cent of their profits in the form of dividend and share buybacks, in line with the past few years’ trends,” Jain said.

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