India’s IT services industry generates most of its revenue from the US, followed by Europe and the rest of the world (RoW) | Photo: Twitter
The Indian IT services industry is likely to record a second consecutive year of moderate revenue growth, estimated at 4-6 per cent in fiscal 2025, but operating profit margin is expected to be healthy, according to ICRA.
Despite persistent challenges and tepid revenue growth, ICRA has forecast that the industry’s operating profit margin (OPM) will remain at a healthy 22 per cent in fiscal 2025, with attrition levels having declined considerably and projected to stabilise in the near term.
Despite expectations of continued moderate growth, ICRA has maintained its “stable outlook” on the Indian IT services industry, led by a well-established business position, expectations of healthy earnings and cash flow generation and strong balance sheets of sector players.
“ICRA expects FY2025 to be the second consecutive year of moderate revenue growth (for its sample companies), estimated at 4-6 per cent, given lower discretionary technology spending by clients amid persistent macroeconomic uncertainty in key markets in the US and Europe,” said Deepak Jotwani, Vice President and Head of Corporate Ratings Sector at ICRA.
Higher inflation and rising interest costs have put pressure on clients in key industries, with an increasing focus on cost optimization and business-critical projects, and deferral of large discretionary spending.
“Although order revenue conversion has slowed, the order backlog and deal pipeline of most IT services companies remain robust. This, coupled with the increasing importance of technology spending by clients as part of their overall capital allocation strategy, is expected to support growth momentum once macroeconomic headwinds subside over the medium term,” Jotwani said.
Revenue growth of Indian IT services companies has remained tepid over the last five to six quarters as the sector continues to face challenges arising from macroeconomic headwinds in key markets.
Accordingly, ICRA sample companies (15 listed, large and mid-sized Indian IT services companies) recorded a modest year-on-year growth of around 5.5 per cent in revenue in USD terms in FY24, down from 9.2 per cent in FY23.
Despite tepid revenue growth, ICRA expects the OPM of its sample companies to remain healthy at around 22 percent in FY25, helped by declining wage cost inflation and optimization of operational efficiencies.
India’s IT services industry generates the largest share in the US, followed by Europe and Rest of the World (RoW) markets.
Companies in the ICRA sample generated 55-60 percent of their Q1 FY25 revenue from the United States, while Europe contributed 22-25 percent, with the remainder coming from Rest of the World markets.
The industry therefore remains susceptible to macroeconomic uncertainties and any adverse regulatory changes in these markets; for example, revenue growth in the US has seen a marked moderation in recent quarters as macroeconomic headwinds continue to intensify. However, despite the moderation, growth in Europe has been more resilient compared to the US.
The increasing adoption of generative AI (Gen-AI) remains a key driver for the sector in the medium to long term. Leading Indian IT services companies have trained a sizeable portion of their employee base in Gen-AI skills and have already started ramping up their capacity and service offerings to deliver AI-based solutions to their clients.
“While the order book or revenue contribution from Gen-AI deals so far is limited, it is likely to increase over the medium term as mainstream adoption of the technology becomes more widespread,” according to ICRA.
Moderating demand coupled with rising utilization of surplus manpower capacity added in FY23 has put pressure on hiring by IT services companies in recent times. This is evidenced by the negative net addition over the last seven quarters for the companies in the sample set, ICRA said.
While the level of negative net addition eased considerably in the first quarter of fiscal year 2025, ICRA expects hiring to remain subdued in the near term until growth momentum materially picks up.
Earlier, hiring by IT services firms hit an all-time high in FY22 and H1 FY23, driven by strong demand for digital technologies and to combat rising attrition levels. Moreover, there has been a steady decline in trailing twelve months (LTM) attrition for firms in the ICRA sample set over the past five quarters.
“Labor attrition in the trailing 12 months of ICRA sample group companies declined significantly to 13.1 per cent in Q1 FY25 from 23.2 per cent in Q2 FY23 as overall slowdown in growth momentum and strong hiring in the previous fiscal corrected the demand-supply mismatch observed earlier. ICRA expects attrition levels to stabilise at a long-term average of 12-13 per cent in FY25, Jotwani observed.
ICRA said it expects the financial profile of most industry players to remain strong, supported by healthy cash flow generation, lower debt and robust liquidity.
(Only the headline and image of this report may have been reworked by Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)
First published: September 10, 2024 | 1:47 PM IS
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