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Companies will lose new deals, which will jeopardize future revenues, and will also face setbacks to existing ones, which can be renegotiated as their overseas clients face difficulties due to blockades, the national rating agency Crisil said in the report.
The $ 97 billion IT sector is one of the largest exporters of services and helps the economy as well by supporting more than 40 lakh of jobs if IT-enabled services are also included.
Major companies, including Infosys and Wipro, earlier this month discontinued the practice of giving annual guidelines, while TCS hinted at pain for the first two quarters of the year.
“Typically, the new deals are finalized between March and May, but this time, most clients will focus on mitigating emerging business risks and will defer discretionary IT spending, while allowing existing contracts to continue,” he said. Crisil’s senior director, Anuj Sethi.
Crisil said the industry’s revenue growth will slow to a decade-low of 0 to 2 percent.
The current restrictions on mobility, which have resulted in the closure of the entire aviation sector, will also cause delays in completing the deal, Sethi added.
The largest banking, financial services and insurance customer segment in the IT industry, accounting for 28% of industry revenue, will drive 8% growth on the top line of the growing share of digital transactions and the presence of larger, longer-term maintenance contracts that are critical to operations, Crisil said.
While the healthcare segment, which represents 8 percent of IT industry revenue, will also grow at similar levels, he said.
However, other segments, including retail (32 percent of revenue from IT services) and communications, aerospace, defense and transportation (22 percent of revenue), and manufacturing, travel, and tourism and oil and energy will see a strong and immediate impact on revenues that are considered slow demand in these sectors, he said.
The rating agency said operating profitability could moderate by 2-2.50 percentage points to a decade low of 20 percent for 2020-21, despite gains from the rupee’s depreciation.
The slowdown in revenue will impact profitability as IT companies will need to continue investing in new-age technologies to show their ability to execute complex digital projects, said associate director Rajeshwari Karthigeyan.
Karthigeyan explained that in the past four years, the share of digital revenue has grown to approximately 40 percent of total revenue, but at the same time has seen a reduction in profit margins of up to 1.50 percent.
IT companies have already streamlined costs and increased utilization rates to record levels of 85-90 percent by increasing the share of fixed-price contracts, making it impossible to make a profit by optimizing employee costs or outsourcing, the agency said.
The rating agency, which studied 15 companies that make up 70 percent of total revenue, said there will be no impact to ratings as a result of this and limited itself to saying that those with a concentration of revenue in weak segments may face some challenges.
He noted the extent of the pandemic and its impact on the global economy as a key factor that can be monitored in the future.
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