IT firms' growth in Q1 FY24 lowest in 10 qtrs, slowdown to get worse: ICRA

Order book and deal pipeline of most companies remain strong, says ratings agency

The information technology (IT) services industry’s revenue growth will likely slow down to 3-5 per cent in this financial year (FY24) due to “persistent macroeconomic uncertainty” and weak demand in the US and Europe, rating agency ICRA has said.

IT services companies growth moderated between Q3 FY23 and Q1 FY24. In Q1 FY24, ICRA’s sample set of companies recorded a revenue growth of 3.8 per cent year-on-year (YoY) in US dollar terms, the lowest in 10 quarters. The companies' revenue growth in the US moderated more compared to that in Europe. Operating profit margins are likely to moderate by 70-100 bps to 20-21 per cent in FY24.

Overall revenue growth is expected to be nearly 3 per cent lower compared with 7.8 per cent industry body Nasscom had estimated for FY23.

Banking, financial services and insurance (BFSI) and communication have slipped more than other sectors. BFSI is hurting due to softness in mortgage, investment banking, capital markets and insurance amidst macroeconomic headwinds.

The communication sector is affected because of the weakening revenue profile of telecom companies, as investments for 5G have not materialised meaningfully and this has led to the reprioritisation of technology spending.

The order book and deal pipeline of most companies remain strong as revenue slows down, said ICRA. Evolving consumer demand after the pandemic has made technology spending integral to the overall capital allocation of corporations. ICRA expected a pick-up in revenue growth when macroeconomic headwinds subside at the end of FY24.

“ICRA expects a moderate revenue growth of 3-5 per cent in USD terms (for its sample set) in FY2024, lower than 9.2 per cent YoY growth in FY2023 owing to persistent uncertainty in the key markets, resulting in pauses and deferral of non-critical projects and slowdown in discretionary IT spends by key sectors like BFSI, retail, technology and communication,” said Deepak Jotwani, assistant vice president & sector head, ICRA.

Hiring by IT services companies has reduced in the last three quarters due to slowdown in growth and utilisation of excess capacity added in FY22 and first half of FY23. Moreover, with easing demand-supply mismatches, there has been a considerable tapering in attrition levels in recent times.

“ICRA expects lower hiring by the IT services companies in the near term because of the expected slowdown in growth and also estimates attrition to further decline over the next few quarters before stabilising at the long-term average of 13-15%,” said Jotwani.