India’s IT services revenue to drop in current fiscal

Revenue of the information technology (IT) services sector in India will drop by 700-900 basis points (bps) to 10-12 percent in fiscal 2024.
IT services companies and employee costIndia’s IT services revenue is expected to achieve 18-20 percent growth in fiscal 2023 (accentuated by a sharp depreciation of 7-8 percent in the rupee). India’s IT services revenue rose ~19 percent in fiscal 2022, the highest in eight years.

The banking, financial services and insurance (BFSI) segment accounts for ~30 percent of the IT sector’s revenues, followed by retail and consumer packaged goods with ~15 percent, with the balance almost equally contributed by life sciences and healthcare, manufacturing, technology and services, communication and media, and others.

Operating profitability will see a modest improvement of 50-60 bps to ~23 percent in fiscal 2024, as IT service firms cut back on new hiring and rein in employee costs.

Anuj Sethi, Senior Director, CRISIL Ratings, said: “Headwinds in key markets, especially the BFSI segment in the US and Europe, will affect the revenue growth of domestic IT services companies.”
IT services companies and employee addition

IT spends by clients are witnessing a shift towards cost optimisation and vendor consolidation away from discretionary spends by most end-user industries.” On its part, operating profitability is expected to moderate 150-175 bps in fiscal 2023 to a decadal low of 22-22.5 percent due to higher employee costs, which form ~ 70 percent of the total cost.

CRISIL Ratings expects these costs to moderate next fiscal, with companies taking a cautious approach to fresh hiring as they attempt to normalise headcount after the hiring peaks of fiscal 2022, which saw the employee count for Tier-I firms3 surge 22 percent.

Attritions have begun to come off in recent quarters and are expected to moderate further. Coupled with levers of optimum on/offshore employee mix, manpower training/ utilisation and benefits of rupee depreciation, players are expected to see operating margins improving by 50-60 bps to ~23 percent in fiscal 2024, but still below pre-pandemic average of ~24 percent seen during fiscals 2016-2020.

Aditya Jhaver, Director, CRISIL Ratings, said: “The full impact of the extraordinary hiring of fiscal 2022 was felt in fiscal 2023, because of which employee cost is estimated to rise by over 20 percent.”

IT companies are focussing on utilisation than advance hiring, supported by lower attrition. This should lead to marginal improvement in operating profitability in fiscal 2024. Larger companies with agile and large spectrum of capabilities will be able to cater better to the changing needs of clients and will be insulated from pricing pressure.

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