Most clients will defer discretionary IT spending this fiscal, says Crisil

Our Bureau Hyderabad | Updated on April 24, 2020 Published on April 24, 2020


Good prospects for BFSI, healthcare verticals

As the Covid-19 pandemic rattles countries, the $97-billion IT industry is expected to witness revenue pressure in the financial year 2020-21. The pandemic could push the IT industry to a decadal low of 0-2 per cent, surpassing the earlier low of 4 per cent registered in the financial year 2017-18, according to CRISIL Ratings.

“Typically, new deals get finalised between March and May, but this time around, most clients will focus on mitigating emerging business risks and defer discretionary IT spend, while letting existing contracts continue. The current restrictions on mobility of people will also delay consummation of new deals,” Anuj Sethi, Senior Director of CRISIL Ratings, has said.

The firm has made this forecast based on the study of 15 large IT firms, which contribute to about 70 per cent of the IT service sector’s revenues.

He said the IT firms could also face the challenge of price renegotiations by clients, which could add to the cost pressure.

Sectoral differences

Large verticals such as manufacturing, travel and tourism, oil and energy, and retail , which account for 32 per cent IT service revenues, and communication, aerospace, defence and transportation, which chip in 22 per cent, will take an immediate impact considering the sluggish demand in these sectors.

CRISIL Ratings said the banking, financial services and insurance (BFSI), which account for nearly 30 per cent, will continue to grow at about 8 per cent. “Rising share of digital transactions and presence of larger and longer-term maintenance contracts that are critical to operations would ensure the 8 per cent growth rate,” he said.

Similarly, the healthcare vertical, which contribute about 8 per cent to the overall revenues, would also see similar growth because of rising digital transactions from hospitals.

“The impact of slowing revenues will, in turn, affect operating profitability despite gains from a depreciating rupee,” Rajeswari Karthigeyan, Associate Director of CRISIL Ratings, has said. “That is because IT firms will have to continue investing in new-age technologies to show-case their ability to service complex digital projects. That may not lead to immediate gains,” she pointed out.

The rating agency felt that there is little scope to optimise employee and outsourcing costs, which together account for 70 per cent of the revenues,as the firms had already streamlined costs and raised employee utilisation rates to peak levels.

CRISIL Ratings, however, sees no material impact on the credit quality of most of the IT firms, given their healthy financial risk profiles supported by low debt levels and large cash surplus.

Published on April 24, 2020
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