As per the report, the profitability in the Indian IT services sector will also take a beating in this financial year. Moreover, the operating profit margin is also expected to reduce by up to 1% to 20-21%, the report added. The report also attributed the slowdown to softening demand to predict that the topline growth in this sector may also come down to 3-5% in FY24 from the 9.2% posted in FY23.
How the IT services sector may be affected
Icra’s sector head Deepak Jotwani said that there has been “persistent uncertainty” in the key markets for IT companies. This has resulted in pauses/deferral of non-critical projects and the slowdown in discretionary IT spending by key sectors like banking, financial services and insurance, retail, technology and communication, Jotwani notes.
Nasscom claimed that the sector directly employs over 50 lakh people. Meanwhile, analysts noted that it was crucial for the post-pandemic recovery of the economy. Such analyses were made due to the impressive growth in the sector as demand for technology inputs grew.
Jotwani also mentioned that lower operating leverage will limit the impact of slower revenue growth on profitability and the ability of most companies to work with multiple levers. This includes onshore-offshore mix, employee utilisation levels, employee pyramid optimisation and ability to manage costs.
The report also said that due to the evolving macroeconomic headwinds in key markets like the US and Europe, the Indian IT services companies saw a sharp moderation in growth momentum between Q3 FY23 to Q1 FY24.
The sample used for the report recorded revenue growth of 3.8% in the first quarter (in USD) which was the lowest in the last 10 quarters. The report also said that growth in the US witnessed a sharp moderation compared to that in Europe.
How different segments performed
BFSI and communication segments were more affected than others. The report noted that softness in mortgage, investment banking, capital markets and insurance segments has impacted the BFSI while the communication segment is facing issues with the weakening revenue profile of telecom companies on 5G investments.
However, the order book and pipeline of most companies remain strong even as the revenue conversion of the orders slowed down, the report added.
Icra also said that it expects a surge in the growth momentum once the macroeconomic headwinds subside by the end of the current fiscal year. The report also noted that hiring by IT services companies has reduced significantly in the last three quarters and the same is expected to continue in the coming quarters.
Jotwani also explained that the sector will further decline over the next few quarters before stabilising at the long-term average of 13-15%.