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Uncertain macroeconomics in key markets like the US and Europe will continue to drag growth for the Indian IT services industry. The industry is poised to witness a modest revenue growth of 2 per cent in the first three quarters of FY24, and it will maintain a restrained trajectory in the range of 3-5 per cent in FY25, according to a report released by ICRA on Monday.
This is the second consecutive year when the credit rating agency has forecasted a growth rate in the range of 3-5 per cent for the Indian IT sector.
“ICRA expects revenue growth (for its sample set companies) in FY25 to remain tepid at around 3-5 per cent for the second consecutive year, given the persistent macroeconomic headwinds in key markets of the US and Europe, resulting in lower discretionary IT spends by corporates,” said Deepak Jotwani, Assistant Vice-President & Sector Head, ICRA.
The agency expects the operating profit margins for the sector to remain healthy at around 21-22 per cent in FY25. ICRA, however, expects a likely pick-up in the growth momentum once the macroeconomic headwinds subside.
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While the impact is broad-based across all key sectors serviced by the industry, the banking, financial services, and insurance (BFSI) and telecom segments have contracted more than the others, Jotwani said.
Growth in the US witnessed a sharp moderation compared to that in Europe. Though the revenue conversion of the orders slowed down, the order book and deal pipeline of most companies remain strong,” said the ICRA report.
Most of the top IT services firms have reported record levels of total contract value (TCV). For instance, Tata Consultancy Services (TCS) reported a TCV of $8.1 billion in Q3FY24. In the first and second quarters, the company reported TCV of $10.2 billion and $11.2 billion, respectively.
Further, hiring in the industry has remained muted over the past five quarters, with negative net addition. This trend is attributed to moderation in demand, coupled with the increase in utilisation of excess capacity added in the last financial year, as highlighted in the study.
“ICRA expects hiring to remain muted in the near term with a gradual pick-up until the growth momentum improves. Moreover, attrition levels are expected to stabilise over the near term, inching closer to the long-term average of 12-13 per cent, as the overall slowdown in growth momentum and strong hiring in the previous financial year has corrected the demand-supply mismatch witnessed earlier,” Jotwani added.
The Indian IT services industry continues to have a net cash surplus position with strong liquidity owing to a high level of operating cash flows and modest capital expenditure and working capital requirements.
“Despite continued substantial dividend pay-outs, share buybacks, and inorganic investments, ICRA expects the financial profile of the majority of the industry players to remain strong, supported by strong cash flow generation, lower debt levels, and strong liquidity,” reads the report.
ICRA, however, notes that because of the evolving consumer demand dynamics, after the pandemic, technology spend has become integral to the overall capital allocation of corporates.
