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Spurt in Outsourcing, Digital Deals to Drive IT Rebound

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A report said that the $100 billion information technology (IT) services sector is expected to stage a strong recovery this fiscal year, with revenue growth of 10-11 percent.

The improvement will ride on increasing outsourcing and accelerating digital transformation services, accentuated by the pandemic, mainly in sectors such as banking, financial services and insurance (BFSI), healthcare, retail, and manufacturing.

In its report, Crisil Ratings said that higher business levels and more profitable digital deals would also help IT services players maintain healthy operating margins.

This, along with already healthy balance sheets, will, in turn, lend a positive bias to the credit profiles of IT service providers, it said.

With customers focussing on optimizing costs, outsourcing of IT services is seeing a steady rise globally. The pandemic has opened up additional opportunities in digital services due to surge in remote working, e-commerce, and automated services, – Anuj Sethi, Crisil Ratings Senior Director

“Ergo, deal wins by Indian players have expanded by 20 percent on-year in fiscal 2021, with 80 percent of these being digital deals across verticals.”

As per the report, the revenue growth in fiscal 2022 will be almost 400 basis points (bps) more than the growth of 6 percent last fiscal and similar to 10 percent growth logged over fiscals 2018-2020.

“That said, revenue growth across business verticals will vary. BFSI, accounting for 28 percent of IT service revenue, will clock 13-14 percent growth this fiscal due to rising share of digital transactions, continued regulatory compliance, and data security,” the report said.

“Retail and manufacturing, which together account for 30 percent of revenues, are expected to recover 8-9 percent after slowing down to 2-3 percent last fiscal.”

While the rising number of online retail transactions and client push towards digital marketing will drive growth in retail, manufacturing could witness some pent-up demand from improving industrial activity globally, the report said.

“Healthcare, though a small segment accounting for 6 percent of revenues, will sustain its high growth at 15-16 percent, benefitting from higher spending on tackling Covid-19 and increasing adoption of virtual services.”

“Other verticals including oil & gas, communication, aerospace, defense, and transportation will see modest growth of 4 percent, while travel & tourism will remain muted this year too, as global travel is not expected to improve significantly.”

In addition, the report said despite stronger revenue growth, operating margins are unlikely to rise beyond the levels witnessed in fiscal 2021.

“Even with modest revenue growth of 6 percent operating margins expanded 200 bps to a seven-year high of 25 percent last fiscal, mainly due to cost savings from lower travel, favorable onshore-offshore mix, and lower attrition levels.”


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