IT Services Industry’s growth rate to moderate: ICRA

The Indian IT services industry witnessed a strong revenue growth during and post the pandemic (H2 FY2021 till H1 FY2023) owing to accelerated demand for cloud and digital services across the globe. However, the growth momentum witnessed a slowdown in the last two quarters due to macroeconomic headwinds in the US and Europe, which together account for 80-90% of the industry’s revenues.

In terms of segment mix, growth from the BFSI segment (contributed ~29% to the revenues of ICRA’s sample set* of top-5 IT services companies during FY2023) tapered more than in other segments because of the recent US banking crisis as well as softness in the mortgage market due to firming interest rates. In terms of geographic mix, revenue growth from the US witnessed a sharper moderation compared to Europe.

Despite a strong order book and deal pipelines of Indian IT services companies, ICRA expects the revenue growth to remain subdued in mid-single digits in USD terms in FY2024. This is owing to persistent uncertainty in these key markets, resulting in delays in decision-making by customers, as visible from the slow-down in the conversion of deals to revenues to some extent. However, evolving consumer demand dynamics and the pandemic made technology spend far more integral to overall capital allocation of corporates, which is likely to support industry growth over medium term.

The operating profit margin (OPM) of ICRA’s sample set remained healthy at ~22.9% in FY2023, although lower by ~190 bps YoY due to wage cost inflation and normalisation of operational overheads. ICRA expects the OPM to remain steady, despite the slow-down in revenue growth, given the agility to work with multiple levers such as onshore-offshore mix, utilisation levels, employee pyramid optimisation etc. to manage costs efficiently.

There was significant reduction in hiring by IT services companies in FY2023, given the slowdown in the growth momentum coupled with utilisation of the considerably excess capacity added in FY2022. Moreover, with easing demand-supply mismatches, attrition levels saw considerable tapering in the last couple of quarters, in sync with ICRA’s earlier expectations.

In line with the past, the sample set companies are expected to weather macroeconomic headwinds in key markets. While revenue growth is expected to slow down in the near term, their credit profiles are not expected to be impacted materially, given their strong business position and balance sheets.