IT Services Industry Faces Sluggish Growth due to Lower Tech Spending

The information technology (IT) services sector is likely to see a second consecutive year of sluggish growth in fiscal 2025, with revenue seen rising 5-7 percent.
Internet user on laptopThe sluggish growth is due to modest increase in technology spends in the key markets of the US and Europe, a CRISIL Ratings study said.

This follows a 12 percent compound annual growth over the decade through fiscal 2024 and ~6 percent on-year growth expected for fiscal 2024.

Operating margin should sustain at 22-23 percent due to prudent management of employee costs (constitutes ~85 percent of total expenses and includes sub-contracting costs), through cautious hiring and with lower attrition reducing replacement cost.

The CRISIL Ratings study of the top 24 firms accounts for ~55 percent of the ~Rs 14 lakh crore revenue last fiscal.

Four sectors account for ~65 percent of the revenue of the Indian IT services sector: banking, financial services, and insurance (BFSI; revenue share of ~30 percent), retail (~15 percent), technology (10 percent) and communications and media (10 percent). Technology spend in these sectors saw muted growth in low single digits in fiscal 2024, amid high interest rates4 and economic slowdown in key markets.

Manufacturing and healthcare segments (revenue share of ~10 percent each) were the only bright spots, with continued double-digit growth in tech spend, given the focus on process automation and research and development-based analytics, especially in healthcare.

“The slowdown in technology spend will continue this fiscal, weighing on the revenue growth of IT service providers. Revenue from BFSI and retail segments will continue to be a drag with subdued growth of 4-5 percent while manufacturing and healthcare will grow at a healthy 9-10 percent. IT spends will remain focused on automation and optimising costs, while most end-user industries are likely to defer large discretionary spends,” Aditya Jhaver, Director, CRISIL Ratings, said.

IT service companies pulled back on addition of fresh talent, resulting in headcount reductions5 by ~4 percent on-year in December 2023. This, along with the decline in attrition to ~13 percent as of December 2023 from the high of 20 percent in fiscal 2023 provided a breather by limiting higher-cost replacement hiring during fiscal 2024.

“We expect IT service providers to remain cautious on fresh hiring this fiscal, too, which will maintain employee utilisation at a healthy level of ~85 percent. With attrition remaining stable and only modest annual increments, operating margin will remain at 22-23 percent,” Joanne Gonsalves, Associate Director, CRISIL Ratings, said.

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