Indian IT giants set for strong cash flow in FY25
MUMBAI, INDIA — A new report by the credit rating agency forecasts that large Indian IT services firms will achieve pre-dividend free cash flow (FCF) margins between 15% and 18% for the fiscal year 2024-2025 (FY25).
This strong financial outlook comes despite projections of moderate revenue growth for the sector in the upcoming fiscal year.
Mid-single-digit growth amid economic uncertainties
According to the report, the Indian IT services sector is likely to experience mid-single-digit annual revenue growth for FY25 on a constant currency basis. This modest growth projection is attributed to clients delaying discretionary IT spending due to economic uncertainties.
However, Fitch Ratings specifically mentions Indian IT giants Tata Consultancy Services, Wipro, and HCL Technologies as companies likely to return 40%-90% of their pre-dividend FCF to shareholders through dividends and share buybacks. This indicates a strong financial position and commitment to shareholder value.
This strong cash flow generation is also expected to provide these companies with high-rating headroom.
Banking sector preparedness for IFRS implementation
The report also touches on the Indian banking sector’s improved capital buffers in recent years. These enhancements are expected to help banks absorb the capital impact of implementing international financial reporting standards (IFRS) without sacrificing loan growth.
Fitch anticipates that the Reserve Bank of India (RBI) will announce the implementation of IFRS 9 accounting norms shortly. This expectation is based on recent comments from the central bank and the sector’s increased preparedness following the COVID-19 pandemic and previous asset-quality stress cycles.
“This is based on the central bank’s recent comments, our belief that regulatory oversight of the financial sector has increased in recent years, and our outlook for a benign operating environment relative to the COVID-19 pandemic era and prior asset-quality stress cycle, which contributed to the sector’s preparedness for implementation,” Fitch noted.
IFRS 9 is a set of accounting rules that helps companies report their financial assets and debts more accurately. It was created after the 2008 financial crisis to fix problems with how companies were reporting these items.
