Outlook on Indian IT services: Fitch Ratings

Fitch Ratings has come out with its report on Indian IT services. The research firm expects the credit profile of Indian IT services companies to remain stable during 2012.

Moderation in Revenue Growth: Revenue growth for 2012 is expected to moderate from the 2011 levels with the anticipated slowdown in demand for IT services due to uncertainty regarding economic growth in the key markets of US and eurozone. Fitch expects 2012 revenue growth to be in the mid-to-high teens compared with growth of above 20% for 2011. Cost Pressures: Indian IT service companies continued employee hirings in 2011 anticipating improving demand similar to that in 2010. Increase in wage costs and other operational expenses in the nine-month period ended December 2011 (9M12) compared with 9M11 affected the EBITDA margins by about 140bp. The moderation in revenue growth is likely to exert further margin pressures. Forex Volatility: Fitch expects the depreciation of the Indian rupee, which has lost about 15% of its value against the US dollar from January 2011 to December 2011, to provide some relief to the margins over the short term as about 60% of Indian IT export contracts are denominated in US dollar. Over the medium term, some of the advantage may erode due to competition among Indian companies for global contracts. Liquidity to Be Comfortable: Fitch believes that the liquidity of the Indian IT services companies will remain comfortable in 2012, backed by high cash balances, low debt levels and positive free cash flows from the recurring and critical nature of IT services. Demand contraction due to a double-dip recession and /or any increase in M&A activity, large dividend payouts, share buybacks and/or expansion in receivables periods are the key risks to liquidity. What could change the outlook? Protracted Downturn: The risk of a double dip recession or continued economic slowdown in the US and/or Europe, which significantly affects revenue growth and profitability and consequently liquidity, could adversely affect the sector

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