The information technology (IT) services sector in India is expected to see a decline in revenue growth by 700-900 basis points (100 basis points is equal to 1 percentage point) amounting to 10-12% in fiscal 2024 amid global macroeconomic and financial sector headwinds, according to a Crisil report.
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The information technology (IT) services sector in India is expected to see a decline in revenue growth by 700-900 basis points (100 basis points is equal to 1 percentage point) amounting to 10-12% in fiscal 2024 amid global macroeconomic and financial sector headwinds, according to a Crisil report.
This (estimated degrowth) will follow a strong 18-20% growth expected in fiscal 2023, supported by a sharp depreciation of 7-8% in the rupee and 19% in fiscal 2022— the highest in eight years up till then, the report said.
A significant appreciation in the rupee and recessionary headwinds may curb IT spending by corporates and they need closer monitoring. The banking, financial services, and insurance (BFSI) segment accounts for about 30% of the sector’s revenues, followed by retail and consumer packaged goods with 15%, with the rest almost equally contributed by life sciences and healthcare, manufacturing, technology and services, communication and media, among others.
Coming to operating profitability, the report, however, said it will see a modest improvement of 50-60 bps to 23% in fiscal 2024, as IT service firms cut back on new hiring and rein in employee costs. In just concluded fiscal 2023, operating profitability is expected to moderate 150-175 bps to a decadal low of 22-22.5% due to higher employee costs, which form 70% of the total cost. CRISIL Ratings expects these employee-related costs to moderate in the 2024 fiscal.
“Headwinds in key markets, especially the BFSI segment in the U.S. and Europe, will affect the revenue growth of domestic IT services companies. While BFSI segment revenue growth is expected to halve to mid-single digit, it would be marginally offset by 12-14% growth in the manufacturing segment and 9-11% growth in other segments. Net-net, there would be moderation in overall revenue growth. Notably, IT spending by clients is witnessing a shift towards cost optimization and vendor consolidation away from discretionary spending by most end-user industries,” said Anuj Sethi, Senior Director, of CRISIL Ratings.
Further, attritions, the report said, have also begun to come off in recent quarters and are expected to moderate further. IT is expected to see operating margins improving by 50-60 bps to 23% in fiscal 2024, but still below the pre-pandemic average of 24% seen during fiscal 2016-2020.
“The full impact of the extraordinary hiring of fiscal 2022 was felt in fiscal 2023, because of which employee cost is estimated to rise by over 20%. Companies are now focussing on utilization than advance hire, supported by lower attrition. This should lead to marginal improvement in operating profitability in fiscal 2024. Larger companies with an agile and large spectrum of capabilities will be able to cater better to the changing needs of clients and, hence, will be insulated from pricing pressure,” said Aditya Jhaver, Director, of CRISIL Ratings.
