The information technology (IT) services sector in India will see revenue growth decline by 700-900 basis points (bps) to 10-12% in fiscal 2024¹ amid global macroeconomic and financial sector headwinds in key markets².

This will follow a strong 18-20% growth expected in fiscal 2023 (accentuated by a sharp depreciation of 7-8% in the rupee) and ~19% in fiscal 2022 (the highest in eight years up till then).

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 banking, financial services and insurance (BFSI) segment accounts for ~30% of the sector’s revenues, followed by retail and consumer packaged goods with ~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 ~23% in fiscal 2024, as IT service firms cut back on new hiring and rein in employee costs.

A Crisil Ratings study of the top 17 firms, which accounted for ~71% of the ~Rs 10.2 lakh crore Indian IT services sector revenue last fiscal, indicates as much.

Says Anuj Sethi, Senior Director, Crisil Ratings, “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. Notably, 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% due to higher employee costs, which form ~ 70% of the total cost (see Annexure). Crisil Ratings expects these costs to moderate next fiscal, with companies taking a cautious approach to fresh hiring (see Annexure) as they attempt to normalise headcount after the hiring peaks of fiscal 2022, which saw the employee count for Tier-I firms³ surge 22%.

Attritions has also 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% in fiscal 2024, but still below pre-pandemic average of ~24% seen during fiscals 2016-2020.

Says Aditya Jhaver, Director, Crisil Ratings, “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.”

With continued healthy cash generation, strong balance sheets and sizeable cash surpluses, Crisil Ratings expects the credit quality of IT service players to remain ‘stable’ in the road ahead. The acquisitive nature of players is also expected to sustain, especially towards opportunities that lead to an enhancement of their product baskets and increase in digital capabilities.

A significant appreciation in the rupee and sharp recessionary headwinds may curb IT spending by corporates and remain monitorable.

¹ Including 1.5-2% of currency depreciation impact
² The US and Europe contribute ~85% of sector revenues
³ Players with revenues more than Rs 40,000 crore