IT sector may grow at a tepid 3-5% next fiscal

The Indian information technology (IT) services industry may grow at a tepid 5% next fiscal year, up from the 2% expansion seen in April-to-December of the current fiscal, rating firm ICRA forecasted.

Persistent macroeconomic headwinds in the key markets of the US and Europe leading to lower discretionary IT spends by companies are likely to hold back industry growth, the ratings agency said.

“The impact is broad-based across all key sectors serviced by the industry. However, the banking, financial services and insurance (BFSI) and telecom segments have contracted more than the others,” Deepak Jotwani, assistant vice-president and sector head, ICRA, said.

“Nonetheless, critical spending and cost optimization deals continue to gain traction, supporting growth prospects to some extent. Moreover, despite expectations of muted topline growth, ICRA expects the operating profit margin for the sample set companies to remain healthy at ~21-22% in FY2025, supported by their ability to optimize operational efficiencies as well as stabilization of wage costs,” Jotwani said.

A well-established business position, expectations of healthy earnings and cash-flow generation, and strong balance sheets are expected to drive revenue growth next fiscal, ICRA said.

In April-to-December of this fiscal, ICRA said its sample set of companies recorded a modest year-over-year growth of 2% in revenues, against 9.2% in FY2023, and added that growth in the US saw a sharp moderation when compared with that in Europe.

Though the revenue conversion of the orders slowed down, the order book and deal pipeline of most companies remain strong, it added.

An evolving consumer demand dynamics post the pandemic has made technology spend far more integral to overall capital allocation of corporates, ICRA said, adding that it expects a likely pickup in growth momentum once the macroeconomic headwinds subside.

In line with the subdued demand prospects, hiring has remained muted for five quarters, with negative net addition because of moderation in demand, coupled with the increase in utilization of excess capacity added in the last fiscal year.

There has also been a steady decline in the last 12-month (LTM) attrition for ICRA’s sample set companies over the last five quarters, it added.

“ICRA expects hiring to remain muted in the near term with gradual pick-up until the growth momentum improves. Moreover, attrition levels are expected to stabilize over the near term, inching closer to the long-term average of 12-13%,” Jotwani said.

The IT services industry continues to have a net cash surplus position, with strong liquidity owing to high level of operating cash flows and modest capex and working capital requirements, ICRA added.