As per ICRA, Indian IT services industry is expected to see a short-term adverse impact due to COVID-19 outbreak. To this end, ICRA expects a lower growth of 3 -5 per cent for the sector during the current financial year. Earlier, the sector growth rate was pegged at 6 -8 per cent by the rating agency.
ICRA added that simultaneous supply and demand shocks are resulting from COVID-19 global outbreak which will materially slow down the economic activity.
Further, it added that with the slowdown in growth during the first half of 2020-21, the margins will also be negatively impacted before a likely recovery in next the financial year. However, the credit outlook for Indian IT companies remains stable which has primarily been 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.
ICRA said on the demand side, developed economies that contribute to majority of the revenues will see delayed off-take of scheduled new projects, reduced discretionary spend as well as overall lower spend owing to sluggish economic growth. Further, on the supply side, Indian IT services will face issues such as travel restrictions to developed countries as well as closure of offices/work from home at various offshore development centres as well as onshore, thereby impacting movement of labour.
The report added that the margins for the Indian IT services are already facing challenging operating environment characterised by continued pressure on commoditised IT services, wage inflation, higher onsite costs necessitated by visa curbs as well as lower discretionary spend by corporate.
The credit rating agency expects large size companies with diversified presence across sectors to manage such headwinds better compared to mid-size companies that have moderately high proportion of revenues coming from a few sectors.
Citing data from Moody’s Investor Services, ICRA said that the US and the Euro zone, which generates more than 80 per cent of IT services export revenues, will see their gross domestic product (GDP) growth fall from 2.3 per cent and 1.2 per cent in calendar year 2019 (estimate) to 1.5 per cent and 0.7 per cent, respectively, in 2020.