Recovery in volumes, shift to non-voice set to lift ITES SMES

SMALL AND MEDIUM ENTERPRISES (SMES), which account for 20-40 per cent of the Indian IT enabled services (ITES) sector’s revenue, have a host of positives to lean on in the current fiscal year (FY22).

The sector operates in three key segments — customer relationship management (CRM), knowledge, and transactions.

In FY21, the sector generated about ~2.7 trillion in revenue. Exports contributed some 90 per cent of this, with CRM accounting for 38 per cent. The domestic industry accounted for only about 10 per cent of revenue, with CRM accounting for a whopping 80 per cent share.

In FY22, the CRM segment is set for an optical recovery in volume, though intense competition from the Philippines will continue to impede full recovery. Thus, SMES having a large exposure to CRM are expected to see volume recovery.

CRM volumes are expected to bounce back amid increasing adoption of robotic process automation, such as chat bots, to transition from pure voice-based services to non-voice-based services.

Government-backed projects, such as Digital India, and demand from the health care industry are expected to boost revenue by 7-10 per cent year-on-year.

Domestic knowledge and transaction services, though having a low share of about 20 per cent, are also expected to benefit from increasing demand from government-backed projects.

On top of all this, operating margins are also likely to expand, with demand revival leading to a pick-up in volume and billing rates in premium digital services.

The message in this milieu is that SMES transitioning to non-voice services are expected to fare better, as they help save costs and improve productivity, thereby easing pressure on margins.