Indian IT-enabled services companies can attain high profitability in the long term and growth of such services will be highly sustainable, according to report by CRIS INFAC, subsidiary of CRISIL.

ITES companies can earn earnings before interest, depreciation, taxes and amortisation (EBIDTA) margins of around 28 per cent and net margins of over 20 per cent over a period of time contrary to the common view that since this was a low value-added service, it was a low margin business.

The CRIS INFAC report says that since sales cycle in ITES deals were typically between 6-12 months and companies need to invest ahead of the demand curve resulting in low utilization rates initially, most companies take four-six quarters to break even.

After that, with a steady state of operations, profitability levels were attainable, which was reflected in the current financials of quite a few large well-managed ITES companies.

Although margins on offer were high, the report says not all players in the sector would thrive. An important differentiating factor among vendors would be quality of human resources.

Companies would need to have people with the requisite technical expertise, domain knowledge and operational skills for offshoring of services and a strong marketing presence in key markets across the world, it pointed out, adding they would need to put in place quality systems and standards that would increase the comfort level of global clients.

According to the report, ITES sector faces a few issues, which if not dealt with, would prove to be a bugbear, the most critical being availability of skilled human resources.

The incremental requirement of employees in this sector was estimated to go up to around 2.40 lakh per year by FY-07.

Hence the emergence of training providers for prospective employees and reduction of attrition rates to manageable levels would be important for continued growth of the sector.

Other issues include mitigation of geo-political risks and creation of legislative provisions that enable data security for BPO work.

Referring to growth of ITES, it said total exports of such services from India were expected to reach $10.35 billion in 2006-07 as against $1.46 billion in 2001-02.

ITES players would need to ensure high utilisation of their facilities and managing attrition rate among employees.

Consequently, the report says that over the next 3-4 years, the third party vendor landscape would be dominated by 20-25 scale players, with a number of cottage operations losing out in the bargain.

The value proposition offered by India in terms of cost differentials and quality enhancement and increasing pressure on clients to maintain cost competitiveness would drive the growth, it said adding, US with its English speaking market would be the largest destination for exports, followed by the United Kingdom.