Indian IT services companies have witnessed a moderation in growth momentum 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. Due to these headwinds, the decision-making towards discretionary IT spending has seen a slight deferment, while the cost optimisation deals continue to generate stable demand. ICRA’s sample set of leading IT services companies reported a YoY revenue growth of 18.4% in INR terms and 9.9% in USD terms in 9M FY2023, against ~17-18% YoY growth in USD terms in FY2022.The sample set also recorded a moderation of ~180-200 bps in OPM in 9M FY2023, compared to FY2022 levels, due to continued wage cost inflation (~80-100 bps) and normalisation of operational overheads. However, the same was partially offset by currency gains due to the depreciation of the INR against the USD and operational efficiencies.
Commenting on near-term expectations on industry performance, Mr. Deepak Jotwani, Assistant Vice President & Sector Head, ICRA, said: “The order book position of leading IT services companies remains strong, which will support the growth over the near term. However, evolving macro-economic headwinds may result in lower order inflows going forward. ICRA expects a moderate revenue growth of 9-11% in USD terms (for its sample set) in the near to medium term. Moreover, the operating margins (OPM) for the sample set is expected to moderate 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.”
In terms of the segment-wise trend, growth in the BFSI segment, one of the key segments for IT companies, has tapered compared to the other segments in recent quarters, which is partially attributable to lower lending activity. Moreover, if the macroeconomic headwinds persist, the mortgage lending and the retail segments are expected to witness relatively higher moderation in growth, compared to the manufacturing and the healthcare segments.
The industry is also grappling with high employee attrition in recent times, led by the demand-supply gap, especially for digital tech talent. However, the attrition is on a declining trend from the last two quarters and ICRA expects attrition to further decline over the next two-three quarters before stabilising, supported by strong hiring in FY2022, which has addressed the demand-supply mismatch to an extent. “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,” Mr. Jotwani added.
Despite expectation of slowdown in growth momentum and moderation in OPM, ICRA maintains its Stable outlook on the Indian IT services industry supported by its cost competitiveness, growing demand for IT services (including digital and cloud services) and healthy credit profile of industry participants, as marked by earnings stability, strong balance sheets and robust debt protection metrics.
