Digital deals to propel IT sector revenues, higher salaries to dent profits in FY22

Indian IT services companies are likely to post a 9-12 per cent revenue growth in USD terms in FY22, helped by the strong demand for digital deals, a report said on Tuesday.

However, the same will not translate into profits, because higher salaries will result in the operating profit margins for the same set of companies to come at 23 per cent from 24.2 per cent in FY21, domestic rating agency Icra said.

The IT sector is one of the few sectors that have not been deeply impacted by the pandemic. IT companies are concerned about talent retention in the future as the demand across the world for their services continues to grow.

"The pandemic is accelerating the secular trends of core modernisation, usage of collaborative technologies and cloud migration as companies shift to digital business models to pursue work-from-home model, which will benefit the IT services companies,” the agency's sector head Gaurav Jain explained.

In the January-June 2021 period, traditional sourcing witnessed an annual contract value (ACV) of USD 15.2 billion, up 15 per cent when compared to the year-ago period, owing to accelerated demand for digital technologies, he added.

The agency said its sample of IT services companies will notch a 9-12 per cent growth in the topline a 0.6 per cent growth in FY21, on both the digital service offerings and also pent-up demand from the pandemic-affected FY21.

The revenue growth will moderate to 6-9 per cent in FY23, it added.

On the profitability front, the OPM (operating profit margins) in FY21 widened to 24.2 per cent from 22.7 per cent in FY20 supported by depreciation of the rupee against the US dollar and lower overheads owing to the pandemic, it said.

“The improvement in OPM witnessed in FY2021 is unlikely to sustain going forward owing to wage inflation, pricing pressure on legacy services and gradual resumption of normal office working and travel compared to work-from-home options seen during FY21,” the agency said.

The OPM for the sample set of 13 companies will narrow to 23.0 per cent in FY22 and reduce further to 22.5 per cent in FY23, it said.