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In the current fiscal year, the growth of India's IT services sector's revenue is projected to slow down to 3%, a notable drop from the 9.2% growth observed in the previous financial year, according to a report by domestic ratings agency Icra Ratings. The report also forecasts a decrease in profitability, with the operating profit margin expected to narrow by up to 1 percentage point, settling within the range of 20-21%.
The growth in topline revenue is anticipated to decrease to a range of 3-5% for the fiscal year 2023-2024, a substantial decline from the 9.2% growth achieved in the previous fiscal year. This slowdown is attributed to weakening demand in the sector.
Deepak Jotwani, the head of the sector at Icra Ratings, highlighted the persistent uncertainty in crucial markets for IT companies. This uncertainty has led to delays and deferrals of non-critical projects, as well as a reduction in discretionary spending on IT by key sectors such as banking, financial services, insurance, retail, technology, and communication.
The IT services sector, responsible for employing over 5 million people according to industry body Nasscom, has played a significant role in post-pandemic economic recovery due to its impressive growth and the rising demand for technology solutions.
Jotwani mentioned that the impact of slower revenue growth on profitability will be mitigated by lower operating leverage. Most companies are expected to utilize various strategies, including adjusting their onshore-offshore mix, optimizing employee utilization levels, refining the employee pyramid structure, and managing costs to navigate this situation.
The report noted that Indian IT services companies experienced a notable deceleration in growth momentum between the third quarter of the fiscal year 2022-2023 and the first quarter of the fiscal year 2023-2024. This was primarily due to macroeconomic challenges in key markets like the US and Europe.
The revenue growth for the sampled companies stood at 3.8% in USD terms in the first quarter, marking the lowest growth rate in the past 10 quarters. Notably, growth in the US market exhibited a sharper decline compared to that in Europe.
The report highlighted that segments such as banking, financial services, and insurance (BFSI) and communication have seen a more pronounced decline compared to other sectors. Within the BFSI sector, softness in areas like mortgage, investment banking, capital markets, and insurance has contributed to the downturn. Additionally, the communication segment is facing challenges due to the weakening revenue profiles of telecom companies amid investments in 5G technology.
Despite the slowdown in revenue conversion, the report emphasized that the order book and deal pipeline for most companies remain robust.
Icra Ratings expressed optimism about a potential resurgence in growth momentum once the macroeconomic challenges begin to recede by the end of the current fiscal year.
In terms of hiring, the report highlighted a significant reduction in hiring by IT services companies over the past three quarters due to the growth slowdown. This trend is expected to persist in the near term.
Jotwani predicted that attrition rates would decline further over the next few quarters before stabilizing at the long-term average of 13-15%.
From a credit profiles standpoint, Icra Ratings maintains a "stable" outlook on the sector, citing factors such as well-established business positions, expectations of healthy earnings and cash flow generation, and strong balance sheets among industry players.
The report anticipates that the majority of industry players will maintain strong financial profiles supported by robust cash flow generation, low debt levels, and healthy liquidity. This is noteworthy even in the face of continued substantial dividend payouts, share buybacks, and inorganic investments.
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