Despite expectations of a slowdown in growth momentum, ICRA maintains its Stable outlook on the Indian IT services industry, led by well-established business position, expectation of healthy earnings and cash flow generation, and strong balance sheets of the industry players.
Commenting on the near-term expectations of industry performance, Mr. Deepak Jotwani, Assistant Vice President & Sector Head, ICRA, said: “ICRA expects a moderate revenue growth of 3-5% in USD terms (for its sample set) in FY2024, lower than ~9.2% YoY growth in FY2023 owing to persistent uncertainty in the key markets, resulting in pauses and deferral of non-critical projects and slowdown in discretionary IT spends by key sectors like BFSI, retail, technology and communication. Moreover, the operating profit margin (OPM) for the sample set is expected to decline by 70-100 bps in FY2024, due to lower operating leverage. Nevertheless, it will remain healthy at 20-21% in FY2024, owing to the ability of most companies to work with multiple levers such as onshore-offshore mix, employee utilisation levels, employee pyramid optimisation, among others, to manage costs”.
Indian IT services companies witnessed a sharp moderation in growth momentum over Q3 FY2023 – Q1 FY2024 owing to the evolving macroeconomic headwinds in key markets of the US and Europe. In Q1 FY2024, ICRA’s sample set recorded a revenue growth of ~3.8% on a YoY basis in USD terms, the lowest in the last 10 quarters. In terms of geography-wise trends, the growth in the US witnessed a sharp moderation compared to that in Europe.
In terms of segment wise growth trend, BFSI and communication has tapered more than other segments. BFSI is impacted due to softness in mortgage, investment banking, capital markets and insurance segments amidst ongoing macroeconomic headwinds. The communication vertical has been impacted because of weakening revenue profile of telecom companies, as the investment made by the customers in 5G have not materialised meaningfully leading to reprioritisation of its technology spendings.
Though the revenue conversion of the orders slowed down, the order book and deal pipeline of most companies remain strong. Moreover, evolving consumer demand dynamics, post the pandemic, have made technology spend far more integral to overall capital allocation of corporates. Therefore, ICRA expects a likely pick-up in the growth momentum once the macroeconomic headwinds subside by the end of the current fiscal.
There has been a significant reduction in hiring by IT services companies in the last three quarters, given the slowdown in the growth momentum, coupled with utilisation of the considerable excess capacity added in FY2022 and H1 FY2023. Moreover, with easing demand-supply mismatches, there has been a considerable tapering in attrition levels in recent times. “ICRA expects lower hiring by the IT services companies in the near term because of the expected slowdown in growth and also estimates attrition to further decline over the next few quarters before stabilising at the long-term average of 13-15%,” Mr. Jotwani added.
The Indian IT services industry continues to have a net cash surplus position with strong liquidity owing to high level of operating cash flows and modest capex and working capital requirements. Despite continued substantial dividend payouts/share buybacks and inorganic investments, ICRA expects the financial profile of the majority of industry players to remain strong supported by strong cash flow generations, lower debt levels and strong liquidity.
