IT sector outlook stable: India Ratings

Last Updated: Wed, Jan 30, 2013 19:23 hrs

India Ratings has maintained a Stable Outlook on Indian IT services companies for 2013 on the likelihood that their credit profile will remain stable during the year.

Strong liquidity underlines the credit stability of the sector in 2013 when revenue growth is likely to be muted and margin stressed.

Revenue growth in 2013 is likely to be at levels witnessed in 2012 due to lower ticket deals rather than mega deals.

Multiple sourcing and increased competitiveness can lead to increased volatility in revenue growth for a few IT companies.

Overall, India Ratings expects EBITDA margins to decline moderately during 2013.

Wage inflation is likely to be the most important pressure point for Indian IT services companies with a large offshore workforce in India in 2013.

The trend towards shorter contract lengths will also lead to higher customer attrition rates apart from impacting margins due to higher client acquisition costs in the year.

Nevertheless, an increase in resource utilisation levels and gains in higher value-added consulting segments are likely to contribute positively to the margins.

However, the possible negative impact of subdued revenue growth and stressed margins will be offset by the continued strong liquidity position of IT companies, which is supported by their high cash balances, nil-to-low debt levels and positive cash flow from operations.

The ratings of individual issuers in the sector could be negatively impacted by key event risks such as debt-funded acquisitions, large dividend pay-outs or share buy-backs which either deplete liquidity or increase financial leverage.

Any materially adverse regulatory developments that try to limit the ability of the US- or Europe-based companies to offshore/outsource contracts could also impact the sector's outlook negatively.

India Ratings-rated IT companies include: IBM India Private Limited ('IND AAA'/Stable), Infinite Computer Solutions (India) Limited ('IND AA-'/Stable), MindTree Limited ('IND AA'/Stable), IBS Software Services Private Limited ('IND BBB-'/ Stable), Megasoft Limited('IND BBB-'/ Negative), Malvi Software Solutions Private Limited('IND BB+'/ Stable).

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