IT services sector to resume growth in 2021-22 on digital demand: Fitch Ratings

On an average, industry-wide revenue declined 6% q-o-q in Q2 FY20, according to Nasscom as project delivery was affected by lockdowns and demand fell amid business disruption. Sectors such as aviation and hospitality have suffered severe downturns and have sharply cut their IT spending.

“The impact of the coronavirus pandemic is likely to be only moderate and “short term", as customers focus on transforming their businesses digitally, moving services and work platforms online, and minimise spending on legacy services," the report said.

The industry is expected to take advantage of its low-cost operations and maintain its strong foothold in the global IT sector. It will continue to remain export-driven as it mainly serves US and Europe-based clients.

According to the report, companies are likely to accelerate their efforts in offering cloud-based online services and online working platforms to keep their businesses afloat. Research company Gartner has forecast that Indian IT services market revenue will expand by a CAGR of 10% and reach $350 billion in 2025.

Fitch believes that IT services companies focussed on digital businesses such as automation software and cloud-based service delivery, are likely to perform better than those with a focus on business process management (BPM) and legacy application and infrastructure services.

Disruptive technologies such as big data analytics, cloud computing and machine learning will become new growth drivers for the IT services industry. “We believe Indian IT services companies will benefit by assisting their customers in achieving automation, adopting cloud services, migrating products and processes online and enhancing customer experiences on digital channels," the report said.

Despite over 90% of employees of most IT companies working from home (WFH), Fitch believes it will not affect revenue growth as most companies have reported seamless transition to WFH.

“Successful WFH measures may imply more offshoring in the longer term, as they give strong evidence that projects can be delivered remotely. We believe the billing rates for onsite work are 3-4 times higher than that for offshore work. As a result, a higher proportion of offshore projects may affect the industry’s revenue growth rate," the report said.

Fitch also believes the impact from the US ban on new H1B and L1B visa applications is manageable. Companies have been increasing local hiring in the US to reduce dependency on the visas, as the related policies have been volatile over the past few years.