Moderate Growth For Indian IT Services In FY16

by CXOtoday News Desk    Feb 13, 2015

growth

Indian IT services sector is expected to have a growth rate of 11-13 percent for FY16, lower than the forecast for FY15 of Nasscom, says a study by research and advisory firm Offshore Insights. Nasscom has estimated a 13-15 percent growth earlier this month. 

The survey, based on 400 companies representing places in North America and Europe, also stated the North American market will continue to recover and show a 5 percent increase in overall IT spending. The UK and Nordic parts will witness similar growth. However other parts of Europe and Japan will see flat budgets, with a few companies even shrinking their IT spending.

On an overall basis, IT services spending will see moderate growth, says the study noting that while new-age providers of software as a service and platform-based services get higher adoption than in the past two years, this will affect offshore revenue growth and while client demand drives look strong, offshore revenue growth will look very similar to FY15.

“While client demand drives are valid, it’s not fully converting into a substantial budget increase. Our interactions show many clients are still conservative. Further, as Europe continues to face economic challenges and oil producing countries face a crunch, we don’t expect global IT spend and offshore spend to increase significantly and growth levels will remain the same as last fiscal,” said Sudin Apte, research director, Offshore Insights.

The survey says overall IT spending has been growing slowly, which was pegged at 2.5 percent in 2013 and 3.5 percent in 2014. This year, IT spending is predicted at 4 percent, which is a slow progress. As far as projects are concerned, 69 percent of respondents will work on existing and regular projects, while 31 pe cent said they were investing in new projects, up from 26 percent last year.

The survey also found one in five firms with a formal role for digital services and the combined revenue of the top five entities in the IT services sector is more than half the country’s total IT exports. “The top Indian players have increased their revenue share but the mid-cap players are getting squeezed, with their share in the overall revenue coming down to 18 per cent from the earlier 21 per cent,” added Apte.

Meanwhile, another advisory firm, India Ratings & Research (Ind-Ra) has maintained a stable outlook on the IT services sector as well as providers for FY16, driven by their steady credit profile and strong liquidity position, with negligible debt. 

We expect IT companies’ revenue growth to remain stagnant at around 13 percent in FY16. The growth will be supported by improved business conditions in North America and higher offshoring by clients in the European region to save cost amid weak economic conditions. 

Ind-Ra believes clients’ spend directed towards ‘run the business projects’ will increase the proportion of fixed price contracts in the overall mix due to tight budgets. This, along with wage inflation due to annual increments, will stress the margins of Indian IT companies. However, margin erosion could be contained somewhat by improved work force utilisation. Companies which increase the proportion of higher value added services in the nature of consulting and system integration opportunities relating to security and social, mobility and analytics and cloud technologies  will be in a better position to maintain margins. 

On the upside, Offshore Insights sees a few sectors where the IT spending will remain robust. While retail, high-tech, healthcare, media, travel and hospitality will witness relatively sluggish growth, the Offshore Insights report said, energy and utilities will witness the highest percentage growth in IT spends at 7.7 percent.

While BFSI and telecom will witness relatively lower growth in budgets, the report said, adding that another key vertical for Indian IT, which is manufacturing, will also witness a 5 percent rise in IT spend.