The Indian IT services sector is likely to see up to 3 per cent contraction in its revenues in the financial year 2020-21 as global spread of the coronavirus epidemic has resulted in simultaneous supply and demand shocks. In long term, the sectoral growth has been pegged between 5-8 per cent over the FY20-FY25 period, according to domestic rating agency ICRA.
"The (IT services) sector is expected to grow at 0 to minus 3 per cent in FY21 versus earlier expectation of 6-8 per cent," ICRA said in its latest report.
ICRA expects supply and demand shocks to materially slow economic activity. The US and Eurozone, which generate more than 80 per cent of IT Services export revenues, are facing GDP contraction, leading to lower demand for IT Services, it said.
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 centers as well as onshore, thereby impacting movement of labour, the ratings agency said. "New projects to be commissioned will be delayed by minimum of 3-6 months while projects in pipeline will also face delays," ICRA added.
"Our IT services growth forecast assumes gradual recovery during the second half of the year, however the evolution of the pandemic remains highly uncertain and the full extent of the economic costs remain unclear at this point of time," ICRA report said.
ICRA, in its report, said that the profit margins for the IT sector will go down as the COVID-19 pandemic has delayed new projects' off-take and deal conversion, while higher price discounts and lower economic growth across the world curtailed overall IT services spend.
"The margins for the Indian IT Services companies will continue to reflect the 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 report said.
The agency expects the pace of new contract award to decline by at least 7-9 per cent in 2021, with manufacturing, travel, airlines, hospitality and retail to be the most adversely hit.
According to ICRA, 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 the US economy and employment will be mildly negative for the Indian IT services sector considering their high dependence on such visas.
As per the report, Tata Consultancy Services (TCS), the country's largest software exporter, is the only company that has announced results for the first quarter. The IT bellwether has reported a decline in both top and bottom line growth for the April-June period and hinted at a return to the pre-COVID levels only in late FY21.
ICRA said that large-size companies with diversified presence across sectors are likely to manage the 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.
By Chitranjan Kumar