Fitch affirms stable rating for IT sector

Global ratings agency Fitch hasaffirmed a stable outlook for the India information technology (IT) servicessector in 2012 on account of its strong liquidity position, even though itwarned that revenue growth of the segment may moderate this year.

"Despite an expected moderation in revenue growth in2012 from 2011 levels, the outlook for the Indian IT services sector is stableon the back of its strong liquidity position," Fitch said in its annualreport, '2012 Outlook: Indian IT Services'.

It further added: "The revenue growth may decline froma slowdown in the demand for IT services because of uncertainty regardingeconomic growth in the key markets of US and euro zone."

According experts, the total Indian IT industry is worthover $70 billion.

Fitch said that hiring by the IT services industry increasedin 2011 in anticipation of improving demand in the sector and this resulted inhigher wage costs and a negative impact on EBIDTA margins in the April-Decemberperiod of 2011.

"The moderation in revenue growth is likely to exertfurther margin pressures," the report said.

However, it added that recent weakening of the rupee againstthe US dollar is likely to provide some relief to the margins.

"The depreciating Indian rupee, which lost around 15per cent of its value against the US dollar in 2011, is likely to provide somerelief to the margins over the short-term as about 60 per cent of Indian ITexport contracts are US dollar-denominated. However, over the medium-term, someof the advantage may erode due to the increasing competition," Fitch said.

Regarding the liquidity situation of the Indian IT servicescompanies, Fitch said it would remain comfortable in 2012, backed by their highcash balances, low debt levels and positive free cash flows from the recurringand critical nature of IT services.

"However, demand contraction due to a double-diprecession and/or any increase in merger and acquisition activity, largedividend payouts, share buybacks and/or an expansion in receivables periods arethe key risks to liquidity," it said.