Growth slowdown for Indian IT services industry in near term, says ICRA report

Indian IT services industry is expected to see a growth slowdown in the near to mid term due to macroeconomic headwinds resulting in lower discretionary IT spends, rating agency ICRA said in a report. ICRA expects revenue to grow moderately at 9-11% in USD terms for its sample set in the near to medium term.

Th growth momentum of IT companies have eased in the last two quarters in constant currency terms owing to the base effect and evolving macroeconomic headwinds in key markets of the US and Europe.

ICRA’s sample set of leading IT services companies reported a year-on-year revenue growth of 18.4% in dollar terms in nine months of FY2023, compared with 17-18% YoY growth in dollar terms in FY2022.

In terms of the segment-wise growth, BFSI segment, one of the key segments for IT companies, has slowed down compared to the other segments in recent quarters, which is partially attributable to lower lending activity, according to ICRA. Moreover, continued macroeconomic headwinds is likely to weigh more on mortgage lending and the retail segments, compared to the manufacturing and the healthcare segments.

Besides, the operating margins (OPM) for the sample set is likely to advance by 150-200 bps in FY2023, due to wage cost inflation and some normalisation of operational overheads. Nevertheless, it will remain healthy (at 20-22%) with some improvement expected over the medium term,supported by stabilisation of wage costs, said the rating agency.

Meanwhile, despite the IT industry witnessing high employee attrition in recent times due to demand-supply gap, the attrition has tapered from the last two quarters. However, the rating agency expects attrition to further decline over the next two-three quarters before stabilising.

“ICRA expects lower hiring by the IT service companies in the near term because of excess capacity added in FY2022 and expected moderation in demand compared to previous fiscals owing to the macroeconomic headwinds,” Deepak Jotwani, Assistant Vice President and Sector Head at ICRA, said.

Further, ICRA maintains its stable view for the Indian IT services market on the back of its cost competitiveness, higher demand for IT services including outsourcing, and healthy credit profile of industry participants.