The Indian IT services sector’s annual revenue growth is likely to slow to 8% to 10% in FY24-FY25 (financial years ending March), on a constant currency basis, from the FY23 average of 16.5% as global IT spending will shrink on slower economic growth in the U.S. and Europe, Fitch Ratings said.
Fitch’s global economic outlook published in June 2023 forecasts U.S. real GDP growth to slow to 1.2% and 0.5% in 2023 and 2024, respectively, from 2.1% in 2022. Eurozone GDP growth is forecast to decelerate to 0.8% and 1.4% in 2023 and 2024, respectively, from 2022’s 3.5%. It also expects a mild recession in the U.S. in 4Q23-1Q24.
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“We expect the FY24 EBITDA margins of Indian IT services companies to be stable y-o-y and remain somewhat below historical averages, as easing cost pressures are offset by a weakening demand environment. We expect larger Indian IT services companies to continue to have high rating headroom due to their strong net cash positions and strong free cash flow (FCF) generation,” the agency said.
“We expect our rated major Indian IT services companies to continue to generate pre-dividend FCF margins of 12% -17% on stable EBITDA profitability and low working-capital and capex requirements. We expect Tata Consultancy Services Limited, Wipro Limited and HCL Technologies Limited to return 40% – 90% of their pre-dividend FCF to shareholders via dividends and share buybacks,” the report said.
“CA Magnum Holdings and its 95.5%-owned subsidiary, Hexaware Technologies Limited (BB-/Stable), have moderate rating headroom. The Stable Outlook reflects our expectations that CA Magnum is likely to keep its EBITDA net leverage below 4.7x in FY24-FY25,” the agency said.
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Published on August 14, 2023
