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Budget 2018
Last Updated : Jan 17, 2018 03:47 PM IST | Source: Moneycontrol.com

Budget 2018: Expect further streamlining in taxation IT, ITeS sector

CRISIL Research expects the profitability of IT services players to decline due to pressure on billing rates in commoditised services, limited scope for improvement in utilisation levels and continued investments in newer technologies such as social, mobile, analytics and cloud.

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Digital services to drive growth; billing rates in commoditised non-digital services to remain under pressure

▪ India’s IT services exports, valued at ~USD 65 billion in fiscal 2017, is estimated to grow at 7-8 percent on-year to USD 69 billion in fiscal 2018. Tier-1 firms logged 6.7 percent growth in revenue in dollar terms in the first half of fiscal 2018, lower than 7.8 percent growth clocked in the same period of the previous fiscal. The rupee’s strength vis-à-vis the dollar, however, weighed down rupee revenue growth to ~2 percent. For fiscal 2019, we expect IT services exports to grow at the same rate in dollar terms.

▪ With non-digital services getting commoditised, companies have stepped up their presence in digital services. In the first half of fiscal 2018, tier-1 Indian firms derived ~20 percent of their revenue from digital services and newer technologies. This, however, is low compared with global peers such as IBM, Accenture, and Capgemini, who derived 35 percent revenue from the same domain in fiscal 2018. Revenue growth in dollar terms is unlikely to regain the double digit growth momentum in the near future, given the increased pricing pressure and global uncertainty.

▪ The domestic IT services market, which grew 9.8 percent to Rs 1026 billion in rupee terms in fiscal 2017, is expected to reach ~Rs 1100 billion this fiscal. We project it to grow at a steady 10 percent in rupee terms in fiscal 2019 as well, driven by government initiatives under the aegis of the ‘Digital India’ programme.

▪ We expect the ITeS industry’s export revenue to grow 7-8 percent to ~USD 28 billion in fiscal 2018 against USD 26.3 billion in fiscal 2017, driven by knowledge-based services such as analytics. We foresee similar growth in fiscal 2019 as well. Domestic revenue, which grew at ~10 percent to Rs 260 billion in fiscal 2017, is expected to grow 8-9 percent in fiscal 2018 to nearly Rs 280 billion in revenue. We expect similar growth in fiscal 2019 as well.

EBITDA margin of IT and ITES services players to narrow by 80-150 bps in fiscal 2019 after a similar decline in fiscal 2018

CRISIL Research expects the profitability of IT services players to decline due to pressure on billing rates in commoditised services, limited scope for improvement in utilisation levels and continued investments in newer technologies such as social, mobile, analytics and cloud. A stronger rupee (versus the dollar) is expected to exert further pressure on margins. However, some support is expected from the recovery of the British pound on-year. We foresee a similar decline in fiscal 2019 as well. We expect pressure on billing rates, pricing in voice services and a stronger rupee to dent profitability of ITeS players. We believe there could be a similar decline in fiscal 2019 as well.

Budget expectations

There could be further streamlining in the IT and ITeS sector with respect to taxation post GST, with players seeking clarity on the place of effective management, service tax and tax refunds in the upcoming budget.

India Union Budget 2018: What does Finance Minister Arun Jaitley have up his sleeve? Click here for live Budget 2018 news, views and analyses.
First Published on Jan 17, 2018 03:46 pm
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