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The Indian information technology services industry is expected to grow at 12-13% in FY23, aided by strong demand for or new-age technologies and fall in Indian rupee, according to rating agency CRISIL.
The slower growth of the IT industry in FY23 compared to 19% growth rate in the last fiscal is due to tightening of IT expenditure by corporates amid the inflationary headwinds in the United States (US) and European Union (EU), which together contribute almost 85% to the sector’s revenue.
The rating agency said that revenue growth is expected to come from various industries which are making a shift towards automation, digitalisation and digital transformation services.
Aditya Jhaver, Director, CRISIL Ratings, said, “With spending on cloud infrastructure expected to grow 1.5 times in the next three years and increasing adoption of new-age technologies such as cybersecurity and Internet of Things, the digital share of revenue of Indian IT service players may cross 50% over the next 1-2 years.’
However, Jhaver noted that rising inflationary headwinds in key client countries may spur corporates to curb discretionary spending and moderate revenue growth over the medium term.
Revenue Mix
Almost 30% of sales of the Indian IT services sector comes from the BFSI verticals, while retail, manufacturing, and telecom verticals contribute 15% each.
The rating agency said revenue growth from BFSI will remain healthy at 15-17% in FY23, compared to 18% last fiscal, despite the increasing interest rates, backed by rising digital transactions, predictive analytics, cloud and data security.
However, companies in the retail, manufacturing and telecom verticals are expected to tighten IT spending amid the highest inflation rates in the past two decades in the key US and EU markets. Hence, revenue growth from these verticals is seen moderating to 11-13% this fiscal from 15-17% last fiscal.
Operating Profitability
The report by CRISIL said that the IT industry’s operating profitability will remain healthy, but could decline to the pre-pandemic low of 22-23%, compared with about 24% last fiscal due to higher expenses.
Tanvi Shah, Associate Director, CRISIL Ratings, said, “The operating profitability will moderate to the pre-pandemic lows given the rising employee costs, both to retain talent amid high attrition and maintain a larger employee base.” Shah added revival in international travel and higher discretionary costs will also weigh on operating profitability.
However, margins for the IT companies will be supported by premium pricing as well as effective cost levers through maintaining a healthy off/on-shore employee mix and reducing sub-contracting amidst rising visa approvals with roll-back of protectionist policies in key service regions.
Meanwhile, the rating agency noted that credit quality of the sector will remain ‘positive’, supported by continued healthy cash generation, strong balance sheets, and robust liquid surpluses. The acquisitive nature of players is expected to sustain, mainly for enhancing digital share of revenues, but this is unlikely to weigh on their credit profiles.
Stocks To Watch
Below are some of the top Indian IT companies listed according to market cap:
Tata Consultancy Services, Infosys, HCL Technologies, Wipro, Tech Mahindra, Larsen & Toubro Infotech, Tata Elxsi, MindTree, MphasiS, L&T Technology Services, Oracle Financial Services, Persistent Systems, Coforge, KPIT Technologies, Happiest Minds Technologies, Birlasoft, Cyient, Sonata Software, Mastek, Zensar Technologies, R Systems International, Newgen Software Technologies, Black Box, Genesys International, Datamatics Global Services, InfoBeans Technologies, Cigniti Technologies, RPSG Ventures, Accelya Solutions India, Sasken Technologies, Expleo Solutions, Nucleus Software Exports, Magellanic Cloud, Saksoft, Ramco Systems.