The Indian IT services industry is expected to post a second consecutive year of mild revenue growth, estimated at 4-6 per cent in FY2025, stated a report by ICRA. Despite persisting challenges, ICRA said that the industry’s operating profit margin (OPM) is expected to remain healthy at approximately 22 per cent in FY2025, with attrition levels having declined considerably and expected to stabilise over the near term.
Even as the report suggests continued subdued growth, it maintains Stable outlook on the Indian IT services industry, led by a well-established business position, expectation of healthy earnings and cash flow generation, and strong balance sheets of the industry players.
Deepak Jotwani, Vice President & Sector Head – Corporate Ratings, ICRA, said, “ICRA expects FY2025 to be the second consecutive year of muted revenue growth (for its sample set companies), estimated at 4-6 per cent, given the lower discretionary technological spends by clients amidst persistent macro-economic uncertainty in the key markets of the US and Europe. Higher inflation and interest costs have exerted pressure on clients across key industries, with an increasing focus on cost optimisation/ business critical projects, and deferment of large discretionary spends.”
“Though the revenue conversion of the orders has slowed down, the order book and deal pipeline of most IT services companies remains strong. This, coupled with the increasing prominence of technological spend by clients as part of their overall capital allocation strategy, is expected to support the growth momentum once the macroeconomic headwinds subside over the medium term,” he added.
Challenges from macroeconomic headwinds in key markets have led to tepid revenue growth for the Indian IT services companies in the last five-six quarters. Accordingly, ICRA’s sample set companies recorded a modest YoY growth of around 5.5 per cent in revenues in USD terms in FY2024, against 9.2 per cent in FY2023.
“Despite tepid revenue growth, ICRA expects the OPM for its sample set companies to remain healthy at ~22% in FY2025, supported by easing out of wage cost inflation and optimisation of operational efficiencies”, Deepak Jotwani said.
Per the report, In terms of geographic split of revenues, the industry generates a lion’s share from the US, followed by Europe and the Rest of the World (RoW) markets. ICRA’s sample set companies generated 55-60 per cent of its Q1FY25 revenues from the US, 22-25 per cent from Europe, and the balance from the RoW markets. Thus, the industry remains susceptible to macroeconomic uncertainties and any adverse regulatory changes in these markets.
Furthermore, ICRA said that higher adoption of generative AI remains a key monitorable for the industry, over the medium to long term. Leading Indian IT services companies have trained a sizeable portion of their employee base in Gen-AI skills and have already started ramping up their capability and service offerings, to deliver AI-based solutions to their clients. While the order book or revenue contribution from Gen-AI deals so far is limited, it is likely to pick up over the medium term, it said.
Meanwhile, hiring by IT services companies in the recent times was under pressure due to moderation in demand, coupled with the increase in utilisation of excess manpower capacity added in FY2023. This, ICRA said, was demonstrated by negative net addition for the past seven quarters for the sample set companies. Even as the level of negative net addition declined considerably in Q1FY25, ICRA said that hiring is expected to remain muted in the near term until the growth momentum picks up materially. Hiring by IT services companies was at an all-time high in FY22 and H1 FY23, buoyed by strong demand for digital technologies and to combat the surge in attrition levels. Moreover, ICRA said that there has been a steady decline in the last twelve-months (LTM) attrition for ICRA’s sample set companies over the last five quarters.
“The LTM attrition for ICRA’s sample set companies tapered significantly to 13.1 per cent in Q1 FY2025 from 23.2 per cent in Q2 FY2023 as the overall slowdown in growth momentum and strong hiring in the previous fiscal corrected the demand-supply mismatch witnessed earlier. ICRA expects attrition levels to stabilise at a long-term average of 12-13 per cent in FY2025,” Deepak Jotwani said.
From: financialexpress
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