India Ratings and Research has maintained a 'stable outlook' on information technology (IT) service providers for 2014-15 to reflect their stable credit profile, low debt levels and cash-rich balance sheet. However, profit margins would remain under pressure due to wage inflation and potential rupee appreciation, the agency said.
The agency said better business conditions in
"The flat to moderately positive budgets of clients, which are under pressure to reduce costs, will push them to opt for outsourcing commoditized services like application maintenance and other labour-based offerings to Indian IT companies," it said. EBITDA (earnings before interest, taxes, depreciation and amortization) margins are likely to remain under pressure for 2014-15 due to wage inflation in the first quarter of the fiscal. India Ratings, which is part of the
"Margin erosion is expected to be partly offset by a stable pricing environment and disciplined bidding to pare low-margin contracts," the agency said. "Higher employee use as well as improvements in productivity levels will also help contain margin erosion," it said. Liquidity is likely to be stable in 2014-15 on the back of large cash balances, low debt levels in balance sheets and no firm commitments on work-related capital expenditure 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," India Ratings said.
Strong cash generation of IT companies would keep liquidity stable, it said. However, a significant rupee appreciation would have a negative impact on the profit margins of Indian IT companies and their outlook, the agency stated.
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