New Delhi: Credit rating agency Icra said that the margin contraction for Indian IT services industry in June quarter was largely owing to higher onsite hiring and sub-contracting costs.
In its latest research report, the agency said it expects FY20 IT services sales growth to remain at 6-8% in dollar terms.
The company based its report on 13 companies that it surveyed.
During Q1FY20 these companies grew by 10.3% in INR terms while in US$ terms they grew by 7.4%. During the quarter the Indian rupee depreciated by 3.7% y-o-y versus US$.
"During the quarter INR depreciated by 3.7% YoY versus US$ and appreciated 1.9% and 2.1% versus GBP/EUR respectively (USA and Europe collectively contribute 85% of ICRA sample set revenues). Few companies reported higher deal wins during the quarter while net employee addition has remained sable during the quarter across majority of our sample companies, being signs of stable demand environment for IT Services sector. The net employee additions show positive trend with approximately 29,305 additions during Q1FY2020 compared to 22,245 in Q4FY2019 and 26,782 in Q1FY2019," stated the report.
With volatile demand from developed economies, companies are increasingly focusing on Rest-of-the-World markets such as Asia Pacific, West Asia and Africa, which are expected to generate higher growth in the future. During Q1FY2020 and FY2019, RoW posted growth of 6.7% and 10.0 respectively, the report said.
The cap on fresh H-1B visa for the US market has remained stagnant since 2014 coupled with 10% lesser issuances of overall (fresh plus renewals) H-1B visa during October-September 2018 period owing to tighter scrutiny led to higher onsite hiring during FY2019.
This has also added to cost for the Indian IT Services players apart from higher visa fees and compliance cost associated with enhanced scrutiny of visa applications.
"In the recent past there have been several proposed legislations to substantially increase the minimum wages for H-1B visa holders, which will impact the margins adversely, if implemented," Icra said in its word of caution for the companies.
However, Icra said, the credit profile of Indian IT services companies remains stable underpinned by their ability to sustain free cash flows despite pressure on revenue growth and margins.
"With aggregate operating margins of ICRA sample set at 22.4% for FY2019 coupled with moderate capex (organic as well as inorganic) and working capital requirements, the free cash flows have remained robust historically," the report said.
Also, the net employee additions show positive trend with approximately 29,305 additions during Q1FY20 as compared to 22,245 in Q4FY19 and 26,782 in Q1FY19.