The Indian IT services industry remains susceptible to macroeconomic uncertainties and adverse regulatory changes in its key operating markets like the US and Europe, according to rating agency ICRA.
Indian IT firms generate around 60-65% of its revenues from the US market and 20-25% from the European market.
"Growth in the BFSI segment, one of the key segments for IT companies, has tapered more than other segments in recent quarters, and this 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 healthcare segments," says Deepak Jotwani, assistant vice president and sector head, ICRA.
While the current healthy order book position from clients will support healthy growth over the near term, the evolving macroeconomic situation is likely to result in lower order inflows going forward, Jotwani cautions.
Management commentary across companies suggests that decision-making on incremental IT spending has slowed down, with the focus shifting towards prioritising critical projects, he adds.
ICRA's sample set of leading IT services companies reported a steady year-on-year growth of 20.1% in revenues in the first half of FY23 in rupee terms, supported by continued demand for increased level of digitisation globally and partially also by the depreciation of the INR against the US dollar over this period.
However, in constant currency terms, the revenue growth for the sample set was relatively lower over the same period.
This comes at a time when the industry is grappling with a surge in employee attrition, led by the demand-supply gap, especially for digital tech talent.
Training and incubation costs for fresh hires recruited over the recent quarters and higher remuneration to retain existing talent led to 200-250 basis points year-on-year moderation in operating profit margin for ICRA's IT sample set in H1 FY23.
While wage cost inflation is likely to start tapering from the end of the current fiscal, margins will remain susceptible to any moderation in business performance due to the macroeconomic headwinds, the ratings agency says.
ICRA, however, maintains its 'Stable' outlook on the sector as it expects minimal impact on the credit profile of most of the industry players as their balance sheets remain strong. "A stretch in the receivables cycle (especially for smaller entities and captive units) and impact of debt-funded inorganic investments remain the key monitorables for select issuers," says Jotwani.
IT bellwether Accenture had earlier indicated a slowdown in client spending. "There continues to be significant economic and geopolitical uncertainty in many markets around the world, which has impacted and may continue to impact our business, particularly with regard to wage inflation and increased volatility in foreign currency exchange rates. In some cases, these conditions have slowed the pace and level of client spending," Accenture said in a regulatory filing last month.