Revenue Growth In The IT Services Industry Is Expected To Fall By 700-900 Basis Points in fiscal 2024.

According to a report published by CRISIL Ratings, India’s information technology (IT) services sector revenue growth is predicted to fall by 700–900 basis points (bps) to 10-12% in the fiscal year of 2023–2024 due to headwinds in the global macroeconomic and financial sectors in key markets.

As per the rating agency, the sector’s income would increase by 18% to 20% this year, which will be boosted by the Indian rupee’s significant decline of 7-8%. In the fiscal year 2022, the sector’s revenue increased by around 19%, making it the highest level in the previous eight years.

However, according to CRISIL, the demand picture would be supported by a solid increase in cost-optimization transactions, strong digital solutions, cloud and automation capabilities, and a variety of offers. The agency’s conclusions were based on an examination of the top 17 companies, which collectively generated around Rs 10.2 lakh crore, or 71%, of the sector’s total income in the previous fiscal year.

Anuj Sethi, senior director at CRISIL Ratings, stated that the banking, financial services, and insurance (BFSI) segment, which generates around 30% of the income for the IT services industry, is the primary cause of the sector’s revenue loss.

The revenue growth of domestic IT services businesses would be impacted by headwinds in important markets, particularly the BFSI industry in the US and Europe. While the BFSI segment’s revenue growth is predicted to fall to mid-single digits, this is only slightly outweighed by the manufacturing sector’s growth of 12–14% and other segments’ growth of 9–11%. Overall, the revenue increase would be moderate. According to CRISIL’s Sethi, the majority of end-user businesses are notably moving away from discretionary IT spending and toward cost optimization.

According to the analysis, operating profitability would slightly increase by 50–60 basis points to about 23% in FY24 as a result of IT businesses limiting new recruiting and controlling staff expenditures. Which make up around 70% of total expenditures. Operating profitability is predicted to decline by 150–175 basis points in FY23, reaching a decade low of 22–22.5%, according to CRISIL. It was also said that these expenses would decrease in FY24 as a result of more careful recruiting.

According to the research, attrition will still be below the pre-pandemic level of about 24% in financial year 2024; attrition is predicted to reduce to 23%. “Fiscal year 2023 saw the full effects of the unprecedented hiring in fiscal year 2022, resulting in a projected over 20% increase in staff costs.” With decreased attrition, businesses are increasingly putting more emphasis on utilization than on advanced hiring.

As a result, operating profitability should slightly increase in the fiscal year 2024. Bigger businesses would be better equipped to adapt to changing customer requirements and, as a result, will be protected from pricing pressure, according to Aditya Jhaver, Director, and CRISIL Ratings.

CRISIL Ratings stated that it anticipates the credit quality of IT service companies to remain “stable” in the next few years thanks to ongoing sound cash creation, robust balance sheets, and sizable cash surpluses.

US and European bank crises will reduce IT companies’ Q1 profit growth by 1% to 2%.

According to Kotak Institutional Equities, the growth of the Indian IT sector in the first half of FY24 would likely be impacted by the near-term slowdown in discretionary expenditure on technology due to the failure of three large US banks and the UBS-Credit Suisse merger. TCS has a 29% exposure to the banking and financial services industry; Infosys has a 26% exposure; Wipro has a 27% exposure; HCL Technologies has a 14% exposure; and Tech Mahindra has a 12% exposure, excluding insurance.

Geographically, Infosys, Wipro, and Cognizant Technology each had a BFSI exposure of 4.9%, 11.7%, and 6.2% in Europe, respectively. Kotak Equities estimate TCS’s exposure to be 13%. To become cloud-first and data-driven businesses, banking and financial services companies have actively invested in technology improvements and cloud migration.

Following the release of the December quarter earnings, leading IT companies expressed their opinion that the US and UK economic downturn had little to no effect on technology investment and that most large US banks had a decent prognosis for the deal pipeline in 2023. The current situation facing the banking industry in developed economies, however, throws a kink in the works.

In its analysis, Kotak Equities stated that “survival of the current crisis and maintaining enough liquidity and capital sufficiency would emerge as the top emphasis, resulting in restraint on expenditure.” As a result, it stated, the technology budgets planned at the beginning of this year might be scaled back to reflect the additional risks the industry is facing.

The firm believes that the present problems in the banking industry will have a 1-2% sequential impact on the growth of earnings in the June quarter. This forecast is predicated on the global banking crisis being resolved quickly and the issues remaining isolated to the banking and financial services industries. “Our current growth projection for leaders for FY2024E is 8%, but the present crisis may reduce that projection by 1% to 2%. The effects of a full-blown recession would be more severe, according to Kotak Equities.

A reduction in discretionary expenditure would badly impact all IT organizations. HCL Technologies and Tech Mahindra are less exposed to the banking industry than other competitors, thus the impact will be smaller. According to Kotak Equities, Tier-1 businesses TCS and Infosys are better positioned than other Tier-1 companies because they can capture both discretionary expenditure and cost take-outs.

The growth rate of the Indian IT services sector may slow down in short to medium term. Given that surplus capacity was built in FY2022, the rating agency ICRA anticipates less employment by IT service businesses shortly and anticipates a moderating in demand compared to prior fiscal years, despite macroeconomic challenges.

Due to the base effect and changing macroeconomic challenges in important markets in the US and Europe, Indian IT services businesses’ growth has moderated over the previous two quarters in constant currency terms. The report said that despite these obstacles, cost-optimization deals continue to generate steady demand while decisions about discretionary IT investment have been slightly delayed.

ICRA stated in a statement that “growth momentum for the Indian IT services industry is expected to slow down in the short to medium term.” The slowdown is due to shifting macroeconomic conditions that are causing discretionary IT spending to decline. According to the forecast, operating profit margins would decline as a result of rising labor costs and normalization of operating expenses, which currency gains would somewhat offset. In comparison to the first nine months of FY2022, ICRA’s sample set of top IT services businesses reported year-over-year revenue growth of 17.1 to 18.4% in USD terms and 9.9 to 10% in rupee terms.

According to the segment-wise trend, the BFSI (banking, financial services, and insurance) area, one of the most important for IT firms, has seen its development slow recently in comparison to the other categories. Less loan activity is also to blame for this. According to ICRA, the mortgage lending and retail sectors are anticipated to have a considerably larger deceleration in growth compared to the industrial and healthcare sectors if the macroeconomic headwinds remain.

The demand-supply imbalance, particularly for expertise in digital innovation, has caused the sector to struggle with excessive employee churn in recent years. Nonetheless, attrition has been dropping over the past two quarters, and ICRA anticipates that it will continue to decline over the following two to three quarters before stabilizing. This prediction is backed by robust hiring in FY2022, which has partially corrected the demand-supply imbalance.

ICRA predicts that there will soon be fewer job possibilities for IT service providers due to the excess capacity established in FY2022 and the predicted decline in demand compared to earlier fiscal years brought on by macroeconomic headwinds.

edited and proofread by nikita sharma