BUSINESS

Revenue growth in the IT services industry may drop to 3% in FY24, according to Icra

According to a domestic ratings business, the revenue growth of the Indian IT services industry would decrease to 3% in the current fiscal year from 9.2% in the prior fiscal year.

According to Icra Ratings, this fiscal year’s profitability will also suffer, and the operating profit margin would drop to 20–21%, a reduction of up to one percentage point.

According to the agency, topline growth would decrease from the 9.2% recorded in FY23 to between 3 and 5% in FY24 due to weaker demand.

Deepak Jotwani, the sector head for the agency, claimed that “persistent uncertainty” in the key markets for IT companies has led to the suspension and postponement of non-critical projects as well as a slowdown in discretionary IT spending by important industries like banking, financial services and insurance, retail, technology, and communication.

According to industry association Nasscom, the sector directly employs more than 50 lakh people, and experts claim that because of its spectacular development as demand for technological inputs increased, it was essential for the post-pandemic recovery of the economy.

According to Jotwani, less operating leverage will lessen the effect of the slower revenue growth on profitability. Most companies will also benefit from being able to work with a variety of levers, including the onshore-offshore mix, employee utilisation rates, employee pyramid optimization, and cost management skills.

According to the agency, the macroeconomic challenges in the important US and European markets caused a severe slowdown in growth momentum for Indian IT services businesses between Q3 FY23 and Q1 FY24.

The agency said that among the regions, growth in the US saw a severe deceleration compared to that in Europe. Its sample set showed a revenue increase of 3.8 percent in the first quarter in USD terms, the lowest in the past 10 quarters.

BFSI and communication have tapered more than other categories in terms of overall growth tendency. The BFSI has been negatively affected by softness in the mortgage, investment banking, capital markets, and insurance sectors, while the communication sector is struggling due to a deteriorating income profile of telecom businesses due to 5G investments.

The order book and transaction pipeline of the majority of enterprises, the agency stated, remain healthy even if the revenue conversion of the orders slowed down.

Icra Ratings further said that as the macroeconomic obstacles pass at the conclusion of the current fiscal, it is expected that the growth momentum would pick up.

On the recruiting front, the agency said that the slowdown in growth has caused IT services businesses to significantly reduce employment over the last three quarters and that this trend would likely continue in the near future.

According to Jotwani, attrition will continue to fall over the next quarters until leveling out at the long-term average of 13 to 15%.

Icra Ratings said that it retains the “stable” assessment on the sector from the standpoint of credit profiles, citing the robust balance sheets of industry participants and their well-established commercial positions as advantages.

The majority of industry players’ financial profiles are likely to remain strong, the agency said, supported by strong cash flow generation, lower debt levels, and strong liquidity. This is true despite ongoing sizable dividend payouts or share buybacks and inorganic investments, the agency added.

 

Related Articles

Back to top button