A recent report has indicated that the Indian IT industry is poised for a period of moderate revenue growth, projected to range from 3 to 5 percent for the fiscal year 2024. This forecast marks a notable decline from the substantial 9.2 percent year-on-year growth witnessed in the previous fiscal year, FY2023.
The analysis, conducted by credit rating agency ICRA, highlights several key sectors —such as Banking, Financial Services, and Insurance (BFSI), retail, technology, and communication — as areas where discretionary spending on IT solutions is anticipated to slow down.
One notable consequence of this trend is the expected decline in operating profit margins (OPM) by 70-100 basis points (bps) during FY2024. This dip is attributed to reduced operating leverage. However, despite this decline, the OPM for the industry is projected to remain at a healthy level of 20-21 percent for FY2024. Industry players are anticipated to employ various strategies — such as optimizing onshore-offshore work distribution, managing employee utilization levels, and refining employee pyramids — to effectively manage costs.
Deepak Jotwani, Assistant Vice President & Sector Head at ICRA, commented on the industry outlook, saying, “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 percent in FY2024, owing to the ability of most companies to work with multiple levers such as onshore-offshore mix, employee utilization levels, employee pyramid optimization, among others, to manage costs.”
The report delves into segment-specific growth trends, revealing that the BFSI and communication sectors have experienced more pronounced deceleration compared to others. The BFSI sector is grappling with challenges stemming from softness in mortgage, investment banking, capital markets, and insurance segments, influenced by ongoing macroeconomic headwinds.
The communication vertical’s slowdown can be attributed to the underwhelming realization of investments made by customers in 5G technology. This has led to a reprioritization of technology spending, causing a strain on the revenue profiles of telecom companies.
The report also highlights a significant reduction in hiring by IT services companies over the past three quarters. This reduction is tied to the deceleration in growth momentum, as well as the utilization of excess capacity that was added during FY2022 and the first half of FY2023.
ICRA’s projections foresee a continuation of lower hiring in the near term, given the expected growth slowdown. Additionally, attrition rates are predicted to decline further over the coming quarters before stabilizing at an average of 13-15 percent in the long term.
Despite the challenges, the Indian IT services industry maintains a favorable financial position, boasting a net cash surplus and strong liquidity. This financial strength is attributed to robust operating cash flows, modest capital expenditures, and manageable working capital requirements.
