Global ratings agency Fitch has affirmed a stable outlook for the India information technology (IT) services sector in 2012 on account of its strong liquidity position, even though it warned that revenue growth of the segment may moderate this year.
"Despite an expected moderation in revenue growth in 2012 from 2011 levels, the outlook for the Indian IT services sector is stable on the back of its strong liquidity position," Fitch said in its annual report, '2012 Outlook: Indian IT Services'.
It further added: "The revenue growth may decline from a slowdown in the demand for IT services because of uncertainty regarding economic growth in the key markets of US and euro zone."
According experts, the total Indian IT industry is worth over $70 billion.
Fitch said that hiring by the IT services industry increased in 2011 in anticipation of improving demand in the sector and this resulted in higher wage costs and a negative impact on EBIDTA margins in the April-December period of 2011.
"The moderation in revenue growth is likely to exert further margin pressures," the report said.
However, it added that recent weakening of the rupee against the US dollar is likely to provide some relief to the margins.
"The depreciating Indian rupee, which lost around 15% of its value against the US dollar in 2011, is likely to provide some relief to the margins over the short-term as about 60% of Indian IT export contracts are US dollar-denominated. However, over the medium-term, some of the advantage may erode due to the increasing competition," Fitch said.
Regarding the liquidity situation of the Indian IT services companies, Fitch said it would remain comfortable in 2012, backed by their high cash balances, low debt levels and positive free cash flows from the recurring and critical nature of IT services.
"However, demand contraction due to a double-dip recession and/or any increase in merger and acquisition activity, large dividend payouts, share buybacks and/or an expansion in receivables periods are the key risks to liquidity," it said.
According to the report, M&A activity is likely to continue in 2012, with Indian IT services companies focusing on acquiring targets in specific industry verticals and geographies.
"The possibility of large-scale acquisitions, which either drain liquidity substantially or increase leverage, continues to be a credit concern," it said.
Fitch added that the outlook for the sector could be revised to negative if there is a sustained decline in EBIDTA margins leading to a reduction in liquidity.
