The revenue growth of the Indian IT sector may fall 8-10% for the current fiscal and in FY25 too due to slower economic expansion in the US and Europe–two of the largest markets for the $245 billion sector, Fitch Ratings said in a note on Monday.
This number compares with 16.5% growth clocked in FY23.
“We expect FY24 growth to be slower than the historical average given the economic uncertainties in the US and Europe,” according to global credit rating firm Fitch Ratings.
The growth forecast cuts in overall US and Europe economies by the same firm is cited as the reason behind the IT sector’s revenue deceleration. Fitch’s global economic outlook published in June forecasts US real GDP growth to slow to 1.2% and 0.5% in calendar years 2023 and 2024, respectively, from 2.1% in 2022.
Similarly, Eurozone GDP growth is forecast to decelerate to 0.8% and 1.4% in 2023 and 2024, respectively, from 2022’s 3.5%. Fitch also expects a mild recession in the US in the December 2023 to March 2024 quarters.
“IT services companies operate in a rapidly evolving sector, where emergence of new technologies such as artificial intelligence and machine learning can be disruptive to the companies’ position,” the report published on Monday said.
The increasing use of cloud infrastructure, rather than owning servers, and the renting of software as a service, instead of buying software, could affect the growth of the Indian IT industry, the report added.
The report, by analysts Nitin Soni and Jia Wen, also pointed out the rising adoption of automated platforms continues to be a threat, which could dilute the labour arbitrage advantage over international peers, hurt profitability and lead to market share loss to innovators in the long term.
The signs of slowdown are already visible in the management commentaries of the companies. Tata Consultancy Services cast doubts on double digit revenue growth for FY24 while Infosys guided 1-3.5% for its lowest expansion in at least a decade. HCL Tech, India’s third largest IT firm, however retained its revenue guidance at 6-8% for the year.
Margin to remain low
The firm expects FY24 operating margins to be stable year on year and remain “somewhat below” historical averages, as easing cost pressures are offset by a weakening demand environment. “We expect industry participants to gradually pass on higher wage costs to customers but expect margins to remain below historical levels until end-2023,” it said.
The agency did not change the ratings or the outlook of the top three IT firms. It also retained A for TCS and A- for both HCLTech and Wipro and also said the upgrade is unlikely unless business profiles improve significantly. CBN Tech