The Indian IT services sector is likely to see a second year of subdued growth in FY25, with modest projected revenue increases of 5-7%, amid ongoing global economic challenges that have limited growth in tech spends in primary markets in the US and Europe, according to a Crisil Ratings report. This has poured water on the much-anticipated recovery in the second half of FY25.
This follows a 12% compound annual growth rate (CAGR) over the past decade, barring a 6% growth in FY24. The study by Crisil Ratings, covering the top 24 firms that make up about 55% of the sector’s revenue last fiscal, supports these findings.
Crisil’s estimation is higher than Infosys’ revenue guidance for the fiscal 2025 of 1-3% from 4-7% a year back.
However, the operating margins are expected to remain stable at 22-23%, supported by careful management of employee expenses, cautious hiring practices and reduced attrition, which lowers replacement costs, the Crisil report said.
The Indian IT services sector’s revenues are primarily driven by four sectors: banking, financial services, insurance (about 30%), retail (around 15%), technology (10%) and communications and media (10%). In FY24, these sectors experienced low single-digit growth due to high interest rates and economic slowdowns in critical markets.
However, the manufacturing and healthcare sectors, each contributing about 10% to revenue, saw continued double-digit growth in tech spending, driven by a focus on process automation and research and development-based analytics, particularly in healthcare.
Aditya Jhaver, director at Crisil Ratings, noted, “The slowdown in technology spend will persist this fiscal year, impacting revenue growth for IT service providers. While revenue from BFSI and retail will likely grow by only 4-5%, manufacturing and healthcare are expected to see healthy growth rates of 9-10%. IT spending will concentrate on automation and cost optimisation, with most industries likely to postpone significant discretionary expenditures.”
As a result of the modest revenue growth, IT service companies have scaled back on hiring new talent, leading to a 4% reduction in headcount in December 2023, the report said.
Additionally, a decline in attrition rates to about 13% in December 2023, down from 20% in fiscal 2023, has eased the pressure of hiring replacements at higher costs. Joanne Gonsalves, associate director at Crisil Ratings, expects that “IT service providers will continue to exercise caution in hiring this fiscal year as well, which will help maintain a healthy employee utilisation rate of around 85%. With stable attrition rates and only modest yearly raises, operating margins are projected to remain at 22-23%.”
Despite the subdued revenue growth, IT service companies continue to secure contracts, and with a focus on integrating Gen AI-based services into their offerings, the medium-term outlook for these companies is promising. Further, companies remain keen on acquisitions, particularly targeting small to mid-sized companies that can expand their product offerings and enhance digital capabilities, the report said.
However, factors such as a potential appreciation of the rupee or prolonged economic recovery delays in key markets due to ongoing geopolitical conflicts pose risks that warrant close monitoring.
Key Findings
- Due to ongoing global economic challenges, tech spends in primary markets in the US and Europe were limited
- Banking, financial services, insurance, retail, technology and communications and media, which drive Indian IT services sector, saw low, single-digit growth in FY24
- However, manufacturing and healthcare, each contributing 10% to revenue, saw continued double-digit growth in tech spends