Jul 15, 2013
India Ratings & Research (Ind-Ra) maintains a stable outlook on the Indian IT services industry for H213. Ind-Ra expects liquidity of the Indian IT services companies to remain comfortable in H213. This is due to their, low debt levels and high cash balances, and positive free cash flows on continued contribution from the recurring and critical nature of IT services.
Ind-Ra expects revenue growth of select IT companies to exceed 10% yoy in H213 on a 6%-7% rupee deterioration in Q213. Revenue of these companies grew below 8% yoy in the last four quarters. The weak rupee will help revenue growth, as the effect of translation increases the ability of IT companies to price better than global rivals. It will also make India-based IT service companies competitive and increase their chances of winning new and renewal contracts. While the current forex rate trend is positive for the IT sector, managing forex risk will remain a key credit factor, especially if there is continued rate volatility.
Ind-Ra believes the US dollar appreciation will ease the expected pressure on EBITDA margins due to wage inflation for companies with a higher proportion of (India-based) offshore revenue. All Ind-Ra rated IT companies fall under this category and are thus well placed to benefit from this situation.
The agency expects the outlook for this sector to remain stable in the medium term. Key event risks that could have a selective negative impact on ratings of IT companies include large dividend pay-outs or share buy-backs, or debt-funded acquisitions, which either drain liquidity or increase financial leverage. Any materially adverse regulatory development significantly impacting the profitability of on an individual company will affect the sector’s outlook.
Ind-Ra 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’/Positive), Megasoft Limited (‘IND BBB’/Negative) and Malvi Software Solutions Private Limited (‘IND BB+’/Stable).