Covid-hit Indian IT services sector heads for deep downturn: ICRA

The simultaneous supply and demand shocks owing to the coronavirus pandemic has hit the Indian IT services sector hard which is expected to witness a negative growth up to -3 per cent in the financial year 2021, as compared to an earlier forecast of 6-8 per cent growth, rating agency ICRA said today.

With the slowdown in growth during the first half of the financial year 2021, the margins will also be negatively impacted before a likely recovery in the financial year 2022.

IT services companies have managed to overcome supply-led challenges through uninterrupted delivery of IT services through work from home model.

However, the challenges on the demand front continue to persist and the sector is expected to grow at -3 per cent to zero in FY2021.

"The US and the Eurozone which generates more than 80 per cent of IT Services export revenues will see their GDP contract by -8 per cent and 10.2 per cent respectively in 2020. The first half of FY2021 will also see impact in the form of price discounts and extended furlough requests by clients as they restructure their businesses," said Gaurav Jain, vice president, ICRA.

"As a silver lining, the Covid-19 pandemic is accelerating the secular trends of core modernization, usage of collaborative technologies and cloud migration as companies shift to digital business models to pursue work from the home model which will benefit IT Services companies," he added.

The large-size companies with a diversified presence across sectors will manage headwinds better compared to mid-size companies which have moderately high proportion of revenues coming from few sectors, coupled with vendor consolidation exercise during Covid-19 benefitting such large size players.

However, the credit profile of Indian IT Services companies is expected to remain stable.

"Credit outlook remains stable led by healthy free cash flows cushioning short term disruptions with significant liquidity in the form of surplus investments generated out of past cash flows," said the report.

The IT services companies achieved 90-95 per cent target of work from home for the majority of the players by April with seamless integration for application, IMS and analytics.

The BFSI vertical was impacted due to required modification in confidentiality agreements with clients while Business Process Outsourcing (BPO) was impacted due to infrastructure constraints.

On the supply side, Indian IT services will continue to face issues such as travel restrictions to developed countries.

New projects to be commissioned will be delayed by a minimum of 3-6 months while projects in the pipeline will also face delays.

"The temporary suspension of issuance of fresh H-1B visas and L-1 visas (inter-company transfer) till December 2020 in view of the impact of Covid-19 pandemic on US economy and employment will mildly impact Indian IT Services sector considering their high dependence on such visas though pandemic has anyways led to reduced travel requirements for the foreseeable future," said ICRA..