IT industry growth likely to slow down: ICRA

Growth momentum of India's IT services sector is expected to witness slowdown in the near to medium term, owing to the evolving macroeconomic headwinds leading to lower discretionary IT spending, according to ICRA.

Indian IT services companies have witnessed a moderation in growth momentum in the last two quarters in constant currency terms, dragged down by the base effect and macro challenges in key markets of the US and Europe, the ratings agency says in a report.

Due to these headwinds, the decision-making towards discretionary IT spending has seen a slight deferment, while the cost optimisation deals continue to generate stable demand, the report says.

ICRA's sample set of leading IT services companies reported a year-on-year revenue growth of 18.4% in rupee terms and 9.9% in dollar terms in the first nine months of FY23, against around 17-18% Y-o-Y growth in dollar terms in FY22. The sample set also recorded a moderation of around 180-200 basis points in operating margins in the first nine months of FY23, compared to FY22 levels, due to continued wage cost inflation and normalisation of operational overheads.

However, the same was partially offset by currency gains due to the depreciation of the rupee against the dollar and operational efficiencies.

"The order book position of leading IT servies companies remains strong, which will support the growth over the near term. However, evolving macro-economic headwinds may result in lower order inflows going forward," says Deepak Jotwani, assistant vice president and sector head, ICRA.

The ratings agency expects a moderate revenue growth of 9-11% in dollar terms in the near to medium term. "The operating margins (OPM) for the sample set is expected to moderate by 150- 200 bps in FY2023, due to wage cost inflation and some normalisation of operational overheads. Nevertheless, it will remain healthy (at 20-22%) with some improvement expected over the medium term, supported by stabilisation of wage costs," says Jotwani.

In terms of the segment-wise trend, growth in the BFSI segment, one of the key segments for IT companies, has tapered compared to the other segments in recent quarters, which is partially attributable to lower lending activity, says the report.

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 the healthcare segments, it adds.

The industry is also grappling with high employee attrition in recent times, led by the demand-supply gap, especially for digital tech talent. However, the attrition is on a declining trend from the last two quarters and ICRA expects attrition to further decline over the next two-three quarters before stabilising, supported by strong hiring in FY22, which has addressed the demand-supply mismatch to an extent. "ICRA expects lower hiring by the IT service companies in the near term because of excess capacity added in FY2022 and expected moderation in demand compared to previous fiscals owing to the macroeconomic headwinds," Jotwani adds.