India's information technology (IT) services sector will see revenue growth decline by 700-900 basis points (bps) to 10-12% in fiscal 2024 amid global macroeconomic and financial sector headwinds in key markets, according to a report by CRISIL Ratings.

This will follow a strong 18-20% growth expected in FY23, accentuated by a sharp depreciation of 7-8% in the rupee, and around 19% in FY22.

However, healthy growth in cost-optimisation deals, along with strong digital solutions, cloud, and automation capabilities, and a wide range of offerings will support the demand scenario, the ratings agency says.

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

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

"Headwinds in key markets, especially the BFSI segment in the US and Europe, will affect the revenue growth of domestic IT services companies. While BFSI segment revenue growth is expected to halve to mid-single digit, it would be marginally offset by 12-14% growth in the manufacturing segment and 9-11% growth in other segments. Net-net, there would be moderation in overall revenue growth," says Anuj Sethi, senior director, CRISIL Ratings.

IT spends by clients are witnessing a shift towards cost optimisation and vendor consolidation away from discretionary spends by most end-user industries, Sethi says.

Operating profitability is expected to moderate 150-175 bps in FY23 to a decadal low of 22-22.5% due to higher employee costs. CRISIL 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 firms surge 22%.

Attrition has also begun to come off in recent quarters and is expected to moderate further, the ratings agency says.

"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%. Companies are now 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, hence, will be insulated from pricing pressure," says Aditya Jhaver, director, CRISIL Ratings.

With continued healthy cash generation, strong balance sheets and sizable cash surpluses, CRISIL expects the credit quality of IT service players to remain 'stable' in the road ahead. A significant appreciation in the rupee and sharp recessionary headwinds may curb IT spending by corporate, it cautions.

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