scorecardresearchIT industry's rough journey likely to continue due to economic headwinds in US, Europe: ICRA

IT industry's rough journey likely to continue due to economic headwinds in US, Europe: ICRA

Updated: 29 Dec 2022, 02:46 PM IST
TL;DR.
The Indian IT services industry reported steady YoY growth of 20.1 percent in revenues in H1 FY2023. “However, the industry remains wary of macroeconomic headwinds in key US and European markets, which, if intensified, are likely to moderate growth in the medium term.”
In terms of geographic split of revenues, the Indian IT industry generates a lion’s share from the US, followed by Europe and the rest of the world (RoW).

In terms of geographic split of revenues, the Indian IT industry generates a lion’s share from the US, followed by Europe and the rest of the world (RoW).

The Nifty IT Index had a rough start to 2022, losing 10.02 percent in January and 2.80 percent in February. The index did increase in value by 7.30 percent in March, but it struggled to hold onto those advances and has since dropped 16 percent.

The index now ranks as the worst performer among all NSE indexes in the current year so far. YTD, the index has dropped by roughly 10,216 points, or 26.39 percent, to 28,484.

In 2021, the Nifty IT rallied 43 percent, owing to substantial earnings growth for IT companies as a result of digital transformation transactions in the United States and Europe.

The value of IT stocks, however, has begun to fall ever since analysts projected a likely recession in the US, the UK, and the Euro Zone. 

Nifty IT has the second largest weight in the Nifty50 index, followed by banking. But despite the IT stocks' poor performance, the benchmark rallied 4.42 percent in 2022.

Going forward, the IT industry is probably going to continue on its rough journey. In its most recent report, the rating agency, ICRA stated that the Indian IT industry will get impacted by the economic headwinds in key markets such as the United States and Europe.

"The Indian IT services industry reported a steady YoY growth of 20.1% in revenues in H1 FY2023. However, the industry remains wary of macroeconomic headwinds in key US and European markets, which, if intensified, are likely to moderate growth in the medium term," the agency added.

In terms of geographic split of revenues, the Indian IT industry generates a lion’s share from the US, followed by Europe and the rest of the world (RoW).

 ICRA’s sample set of 11 leading IT services companies resonates with this trend and generated 61 percent of its FY2022 revenues from the US, 26 percent from Europe, and the balance 13 percent from the RoW.

Given that, the industry remains susceptible to macroeconomic uncertainties and any adverse regulatory changes in its key operating markets in the US and Europe, it added. 

ICRA's sample set's revenue growth in its key market, US, moderated slightly in H1 FY2023 (17.6% in CC terms versus 19% YoY in FY2022), primarily due to the base effect and also partly attributable to an uncertain macroeconomic environment. 

However, YoY growth for the same period in rupee terms for the sample set was higher at 23.2 percent (versus 20.4% YoY in FY2022), aided by considerable depreciation of the INR against the USD.

While the current healthy order book position from clients in the US will support growth over the near term, evolving macroeconomic headwinds may result in lower order inflows going forward, the agency pointed out.

Across industries, the healthcare segment continued to witness steady growth accelerated by the pandemic, while other segments—BFSI, retail, and manufacturing—saw a strong uptick in growth in FY2022, supported by an acceleration in digital adoption and cloud adoption post-pandemic.

ICRA maintains its stable outlook on the sector as the credit profile of Indian IT services companies remains comfortable, supported by healthy internal accrual generation and strong balance sheets.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.

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First Published: 29 Dec 2022, 02:46 PM IST