Demand for digital technologies and resumption of normal economic activities will drive sales for IT companies, and the sector will post a revenue growth of up to 9 per cent in 2021-22, a report said on Thursday.
Rating agency Icra gave a "stable" outlook for the sector, whose size is pegged at over $180 billion by industry lobby Nasscom, including the business process outsourcing business.
The IT services sector's revenues will rise between 7-9 per cent in rupee terms and between 5-8 per cent in dollar terms in 2021-22, it estimated.
It can be noted the pandemic has dented activities across sectors and the IT business is one of the few isles of growth.
All the top IT companies have reported a handsome performance for the third quarter of 2020-21 and make optimistic guidance.
Nasscom stopped an over two decade old practice of giving an aspirational growth target for the industry two years ago.
"Growth in INR expected to be 7-9 per cent while in US dollar terms it will be 5-8 per cent growth for FY2022, demand for digital technologies and resumption of normal economic activity will drive growth," Icra said.
Icra's vice president Gaurav Jain said: "Demand for IT services has been mildly impacted due to COVID-19 pandemic on all end-user industries though some sectors like travel/hospitality, retail, oil/gas have been impacted more severely."
Jain added that higher adoption of digital services has mitigated the impact to a large extent with companies ensuring that nearly 95 per cent of their staff transition to work-from-home.
The BFSI (banking financial services and insurance) vertical was initially impacted as modifications were required in confidentiality agreements with clients while the BPO vertical was impacted due to infrastructure constraints, he added.
The pace of conversion of earlier deal wins into revenues picked up pace after some moderation during June quarter of this fiscal year, while the focus of new deals is now on cost take-outs, cloud transformation, virtualisation and digital customer experience, he said.
The pricing pressure mostly seen in legacy work during contract renegotiations too has been compensated by new digital transformation deals, he said.
There will be little impact on growth and profitability for the companies, he said, adding that margins will be in line with pre-COVID-19 levels, in 2021-22 for such companies.
The key risks for the companies in the sector continue to be increase in minimum wages, changes to eligible occupations, frequency and restrictions in issuance for H-1B visas, he said.
The rating agency said 82 per cent of the 52 companies it rates in the sector are in the investment grade category, indicating healthy cash flow generation led by higher margins and low working capital requirements, it said.