Even as demand for outsourcing revives, wage inflation and a potential rupee appreciation could put margins of Indian IT firms under pressure during the next fiscal, India Ratings & Research today said.
Maintaining a stable outlook, the ratings agency said better business conditions in Europe and North America will result in revenue growth for IT service providers in FY'15.
However, margins will remain under pressure due to wage inflation and potential rupee appreciation, it added.
"For FY15, EBITDA margins are likely to remain under pressure due to wage inflation in Q1 FY15. Ind-Ra expects the Indian rupee to appreciate to around 56-57/USD by end-March 2015, which will further depress EBITDA margins," it said in a statement.
It added that margin erosion could be partly offset by a stable pricing environment and disciplined bidding to pare low-margin contracts.
Higher employee use as well as improvements in productivity levels will also help contain margin erosion, it said.
Revenue growth for FY'15 is likely to improve marginally from about 13 per cent in FY'14, India Ratings said.
Improving business environment and competitiveness of Indian exporters on the back of a depreciated rupee is expected to support this growth.
"The flat to moderately positive budgets of clients, which are under pressure to reduce costs, will push them to opt for outsourcing commoditised services like application maintenance and other labour-based offerings to Indian IT companies," it said.
India Ratings said liquidity for domestic IT firms is likely to be stable in FY'15 on the back of large cash balances, low debt levels in balance sheets and no firm commitments on work-related capex or share buyback programmes in the near term.
"Acquisitions by companies looking to enter into the mobile applications or cloud computing space could reduce the large cash balance as could large dividend pay-outs. However, the strong cash generation of IT companies will keep liquidity stable," India Ratings added.
