Driven by an improvement in demand and stable pricing, the outlook for the Indian IT services sector is stable for 2011, says rating agency Fitch.
It said revenue growth for 2011 is expected to be higher than in 2010, supported by the continued recovery in demand for short-term discretionary and consulting projects, an improved new deal pipeline, and an increase in the market share of Indian companies for IT contracts.
Indian IT service companies resumed hiring during 2010 in anticipation of an imminent increase in demand. The increase in employee costs hit EBIDTA margins by about 150-250bps during the nine month period ended December 2010 (9mFY11). The expected increase in demand and consequent utilisation of the new hires are likely to stabilise EBITDA margins in 2011.
Fitch expects the liquidity position of Indian IT services companies to remain comfortable, if the current growth momentum continues. A double-dip recession in the developed economies of the US and western Europe, leading to a contraction in demand or longer receivable periods, and/or an increase in M&A activity could reduce liquidity.
Fitch expects that M&A activity will continue in 2011, with the focus being on adding technical know-how and increasing geographical spread.
The key areas where Indian IT service companies are looking to strengthen their presence through acquisitions are consulting, analytics and cloud computing. The possibility of large-scale acquisitions, which would either drain liquidity substantially or increase leverage, continues to be a credit concern.