India’s IT Sector To Witness Reduced Revenue Growth Of 3% In FY24: ICRA

Domestic ratings agency ICRA said the revenue growth of the IT sector will decline to 3 per cent in the current fiscal, as compared to 9.2 per cent growth last year.

India’s IT sector is projected to see a slowdown in it’s revenue growth in the ongoing fiscal year. Domestic ratings agency ICRA said the revenue growth of the IT sector will decline to 3 per cent in the current fiscal, as compared to 9.2 per cent growth seen in the previous fiscal year. The agency attributed the dip in growth to a slowdown in demand.

According to a PTI report, the profitability of the sector is expected to take a hit in the year. The agency projected a fall in the operating profit margin of the sector by around 1 percentage point to 20-21 per cent. Further, the topline growth is expected to decline to 3-5 per cent in the current fiscal year, as compared to the previous growth of about 9 per cent reported in the fiscal year 2022-23.

The agency’s sector head Deepak Jotwani noted that the market has witnessed consistent uncertainty regarding the IT companies, which has in turn led to non-critical projects being held up and delayed. Further, there has been a decline in discretionary IT spending by major sectors like banking, insurance, financial services, retail, technology, and communication. 

According to Nasscom, the IT sector provides direct employment to more than 50 lakh people. The report noted that analysts hailed the sector as pivotal for the economy to recover post-pandemic due to the robust growth in the sector on account of increasing demand for technology inputs. 

Jotwani stated that the lower operating leverage will restrict the impact of the reduced revenue growth on the sector’s profitability, and most companies’ ability to work with multiple levers like an onshore-offshore mix, employee utilisation levels, ability to manage costs, employee pyramid optimisation, and more will certainly help the sector.

ICRA noted that the companies in the Indian IT services sector saw a major moderation in their growth momentum between the third quarter of the previous fiscal year and the first quarter of the ongoing fiscal year. This slowdown was a result of the changing macroeconomic headwinds in the US and European markets. The agency stated that it’s sample set reported a 3.8 per cent revenue growth in the first quarter, the lowest in the last 10 quarters. 

Among geographies, the agency reported that the US saw a sharp moderation in growth in comparison to Europe. In the segment-wise growth trend, the BFSI (Banking, financial services, and insurance) and communication sectors witnessed weaker growth in comparison to others. A slowdown in mortgage, investment banking, capital markets, and insurance segments led to a decline in the BFSI sector. The communication sector suffered due to headwinds on the weakening revenue profile of telecom companies on 5G investments. 

However, the agency stated that the growth momentum is estimated to revive after the macroeconomic headwinds calm down by the end of the current financial year.

Further, the agency noted that the growth slowdown in the sector has caused a major decline in hiring by IT services companies over the last three quarters. This decline is expected to continue in the short term. Jotwani added that the attrition rate will be on a downward trend over the next few quarters and stabilise in the long term at an average of 13-15 per cent.

ICRA maintained a stable outlook on the sector in terms of the credit profile, counting the sector’s well-established business position, cash flow generation, and strong balance sheet among it’s strengths.