Fitch Ratings say that the outlook for Indian information technology (IT) services sector is stable for 2010, reflecting a gradual improvement in worldwide demand. Concerns for 2010 include currency volatility, imminent salary hikes for employees, US regulatory risks and the pace of demand recovery.
Fitch projects a gradually improving quarterly revenue growth through 2010 for large players like TCS, Infosys and Wipro as an improving global economy leads to a gradual recovery in client demand for discretionary expenditure and longer-term transformational engagements in lieu of cost-reduction projects with near-term paybacks. IT services revenue growth will also benefit from growth opportunities relating to healthcare, telecom and Internet security, along with a revival in demand of the banking, financial services and insurance (BFSI) sector. The BFSI sector is the second-largest purchaser of IT services worldwide behind the government market.
Fitch expects acquisition activity to continue in 2010, as companies are trying to utilize the excess cash to diversify service line mix, expand geographically, and/or add capabilities in targeted vertical markets. In certain cases, these acquisitions could be debt-funded, potentially pressuring credit profiles.
Reflecting the geographical concentration of revenues, Indian IT services companies book most of their revenues in US dollars, while service delivery costs are in Indian rupees. As the Indian rupee has appreciated against the dollar since April 2009, many companies were caught off-guard as their hedge position proved inadequate. Most of the bigger IT players, with the exception of Wipro, do not seem to have any elaborate policy for hedging currency fluctuations, which could be one of the key concerns for the sector.
IT outsourcing revenues from the US could be exposed to regulatory risk, given the current pressures of unemployment. The US government has vaguely outlined plans to end tax breaks for companies outsourcing work to other countries. However, Fitch has not so far seen any significant cutbacks in outsourcing by US companies attributable to tax concerns.
