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Indian IT services' revenue growth will slow down to 8-9% in fiscal 2017, lower than the 10-12% guidance given by industry lobby Nasscom, India Ratings said on Tuesday.
"We expect the sector's revenue growth to taper down to 8-9% in FY17 on the back of flat-to-marginally negative IT budgets of clients," it said in a note.
The agency's estimate is lower than the 10-12% guidance for the entire sector given by Nasscom earlier this month. It is also lower than the 12.3% growth rate, the industry is set to achieve in FY16.
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It said the increasing cost reduction expectations due to automation of a large part of traditional services would result in lower budgets for the 'run the business' projects.
As for the 'change the business' projects, the rating agency said budgetary allocations for them as well remain small as clients run pilot programmes to figure out which digital solutions would work best.
The rating agency gave a "stable outlook" to IT services sector on steady credit profiles and strong liquidity positions with negligible debts.
It said a stronger US Dollar will impact the profitability of North American companies, increasing their sensitivity to the cost of their 'run the business' projects.
The agency added that demand from European regions is likely to show a positive bias due to a weaker euro.
The pre-tax profit margins for the IT companies will be in the range of 22-23% in FY17, which is lower than the 24.5% achieved by companies in the calendar year 2015.
The margins will be impacted by wage inflation and a higher proportion of commoditised offerings being converted into fixed-price contracts due to increased competitiveness.
Even though it gave a stable outlook, India Ratings said cash drains due to large acquisitions or dividend pay-out or share buyback could impact the credit profiles of IT companies.
