IT service cos stare at second successive year of muted revenue growth

Operating margin to sustain at 22-23% amid cautious hiring, lower attrition; credit profiles stable

The information technology (IT) services sector is likely to see a second consecutive year of sluggish growth in fiscal

2025, with revenue seen rising 5-7%, as continuing global macroeconomic headwinds lead to modest increase in

technology spends in the key markets of the US and Europe.

This follows a 12% compound annual growth over the decade through fiscal 2024 and ~6% on-year growth expected for fiscal 2024.

Operating margin, however, should sustain at 22-23% due to prudent management of employee costs (constitutes ~85% of total expenses and includes sub-contracting costs), through cautious hiring and with lower attrition reducing replacement cost.

A CRISIL Ratings study of the top 24 firms, accounting for ~55% of the ~Rs 14 lakh crore sectoral revenue last fiscal, indicates as much.

Four sectors account for ~65% of the revenue of the Indian IT services sector: banking, financial services, and insurance (BFSI; revenue share of ~30%), retail (~15%), technology (10%) and communications and media (10%). Technology spend in these sectors saw muted growth in low single digits in fiscal 2024, amid high interest rates and economic slowdown in key markets.

Manufacturing and healthcare segments (revenue share of ~10% each) were the only bright spots, with continued double-digit growth in tech spend, given the focus on process automation and research and development-based analytics, especially in healthcare.

Says Aditya Jhaver, Director, CRISIL Ratings, “The slowdown in technology spend will continue this fiscal, weighing on the revenue growth of IT service providers. Revenue from BFSI and retail segments will continue to be a drag with subdued growth of 4-5% while manufacturing and healthcare will grow at a healthy 9-10%. IT spends will remain focused on automation and optimising costs, while most end-user industries are likely to defer large discretionary spends.”

As revenue growth remained subdued, IT service companies pulled back on addition of fresh talent, resulting in headcount reductions by ~4% on-year in December 2023 (see Annexure). This, along with the decline in attrition to ~13% as of December 2023 from the high of 20% in fiscal 2023 provided a breather by limiting higher-cost replacement hiring during fiscal 2024.

Says Joanne Gonsalves, Associate Director, CRISIL Ratings, “We expect IT service providers to remain cautious on fresh hiring this fiscal, too, which will maintain employee utilisation at a healthy level of ~85%. With attrition remaining stable and only modest annual increments, operating margin will remain at 22-23%.”

CT Bureau