A moderate revenue growth of 3-5 per cent, in US dollar terms in FY24, is being expected for the Indian IT services industry, according to ICRA.
This is lower than the 9.2 per cent YoY growth seen in FY2023 and is owed to persistent uncertainty in key markets, resulting in pauses and deferral of non-critical projects and a slowdown in discretionary IT spending by key sectors like BFSI, retail, technology, and communication.
Deepak Jotwani, Assistant Vice President & Sector Head, ICRA, said, “The operating profit margin (OPM) for the sample set is expected to decline by 70-100 bps in FY2024, due to lower operating leverage. Nevertheless, it will remain healthy at 20-21 per cent in FY2024, owing to the ability of most companies to work with multiple levers such as onshore-offshore mix, employee utilisation levels, and employee pyramid optimisation, among others, to manage costs”.
Indian IT services companies witnessed a sharp moderation in growth momentum over Q3 FY2023 – Q1 FY2024 owing to the evolving macroeconomic headwinds in key markets of the US and Europe. In Q1 FY2024, ICRA’s sample set recorded revenue growth of 3.8 per cent on a YoY basis in USD terms, the lowest in the last 10 quarters. In terms of geography-wise trends, the growth in the US witnessed a sharp moderation compared to that in Europe, it noted.
In terms of segment-wise growth trends, BFSI and communication have tapered more than other segments. BFSI is impacted due to softness in mortgage, investment banking, capital markets, and insurance segments amidst ongoing macroeconomic headwinds. The communication vertical has been impacted because of the weakening revenue profile of telecom companies, as the investments made by the customers in 5G have not materialised meaningfully leading to reprioritization of its technology spending.
Though the revenue conversion of the orders slowed down, the order book and deal pipeline of most companies remain strong. Moreover, evolving consumer demand dynamics, post the pandemic, have made technology spend far more integral to overall capital allocation of corporates. Therefore, ICRA expects a likely pick-up in the growth momentum once the macroeconomic headwinds subside by the end of the current fiscal.
Despite expectations of a slowdown in growth momentum, ICRA maintains its Stable outlook on the Indian IT services industry, led by a well-established business position, expectation of healthy earnings and cash flow generation, and strong balance sheets of the industry players.