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IT services sector’s revenue growth to slow to 3% in current fiscal, ICRA

Indian IT services sector’s revenue growth will slow down to 3% in the current fiscal from 9.2% in the previous financial year, a domestic ratings company said on Tuesday.

Icra Ratings said the profitability will also take a beating in this financial year and the operating profit margin will narrow by up to 1 percentage point to 20-21%.

The topline growth will come down to 3-5% in FY24 from the 9.2% posted in FY23, the agency said, attributing the slowdown to softening demand.

The agency’s sector head Deepak Jotwani said there has been “persistent uncertainty” in the key markets for IT companies which has resulted in pauses and deferral of non-critical projects and slowdown in discretionary IT spends by key sectors like banking, financial services and insurance, retail, technology and communication.

As per industry lobby Nasscom, the sector directly employs over 50 lakh people while analysts say it was crucial for the post-pandemic recovery of the economy because of the impressive growth in the sector as demand for technology inputs grew.

Jotwani said lower operating leverage will limit the impact of the slower revenue growth on the profitability, and the ability of most companies to work with multiple levers such as onshore-offshore mix, employee utilisation levels, employee pyramid optimisation, and ability to manage costs will help.

The agency said Indian IT services companies witnessed a sharp moderation in growth momentum between Q3 FY23 to Q1 FY24 owing to the evolving macroeconomic headwinds in key markets of the U.S. and Europe.

Its sample set recorded a revenue growth of 3.8% in the first quarter in USD terms, the lowest in the last 10 quarters, the agency said, adding among the geographies, growth in the U.S. witnessed a sharp moderation compared to that in Europe.

In terms of segment wise growth trend, BFSI and communication has tapered more than other segments. Softness in mortgage, investment banking, capital markets and insurance segments has impacted the BFSI while the communication segment is facing headwinds on weakening revenue profile of telecom companies on 5G investments.

However, even as the revenue conversion of the orders slowed down, the order book and deal pipeline of most companies remain strong, the agency said.

Further, Icra Ratings said it expects a likely pick-up in the growth momentum once the macroeconomic headwinds subside by the end of the current fiscal.

On the hiring front, the agency said the slowdown in growth has led to a significant reduction in hiring by IT services companies in the last three quarters and the same will continue in the near term.

Jotwani said that attrition will further decline over the next few quarters before stabilising at the long-term average of 13-15%.

From a credit profiles perspective, Icra Ratings said it maintains the ‘stable’ outlook on the sector pointing to strengths like well-established business position, expectation of healthy earnings and cash flow generation and strong balance sheets of the industry players.

Financial profiles of the majority of industry players are likely to remain strong supported by strong cash flow generations, lower debt levels and strong liquidity, the agency said, adding that this is despite continued substantial dividend payouts or share buybacks and inorganic investments, it said. PTI

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