The information technology (IT) services sector will witness a decline in revenue growth by 700- 900 basis points to reach 10-12 per cent in fiscal 2024 courtesy the global macroeconomic and financial sector headwinds in key markets. According to a CRISIL Report, the decline will follow a strong 18-20 per cent revenue growth in fiscal 2023 which was majorly due to a sharp depreciation of 7-8 per cent in the rupee and ~19 per cent in fiscal 2022.
While there will be decline in the revenue growth, demand scenarios will be supported by a healthy growth in cost-optimisation deals, along with strong digital solutions, cloud, and automation capabilities, and a wide range of offerings. “Headwinds in key markets, especially the BFSI segment in the US and Europe, will affect the revenue growth of domestic IT services companies,” said Anuj Sethi, Senior Director, CRISIL Ratings.
The BFSI segment accounts for ~30 per cent of the sector’s revenues, while retail and consumer packaged goods accounts for ~15 per cent and the remaining is contributed by life sciences and healthcare, manufacturing, technology and services, communication and media, and others. “While BFSI segment revenue growth is expected to halve to mid-single digit, it would be marginally offset by 12-14% growth in the manufacturing segment and 9-11% growth in other segments. Net-net, there would be moderation in overall revenue growth,” Sethi added.
Reining in employee cost in fiscal 2024
Meanwhile, operating profitability will see a modest improvement of 50-60 bps to 23 per cent in the fiscal 2024 with IT service companies cutting back on new hiring and reining in employee cost. This is on the basis of a CRISIL
Operating profitability is expected to moderate 150-175 bps in fiscal 2023 to 22-22.5 per cent due to higher employee costs. The next fiscal will witness these costs moderating with companies taking a cautious approach to fresh hiring, after the hiring peaks of fiscal 2022. The fiscal 2022 saw the employee count for tier-I companies surge 22 per cent. Attritions has also begun to come off in the recent quarters. “Companies are now focussing on utilisation than advance hiring, supported by lower attrition. This should lead to marginal improvement in operating profitability in fiscal 2024,” said Aditya Jhaver, Director, CRISIL Ratings.
Going forward, as CRISIL maintained, the credit quality of IT service players will remain stable with continued healthy cash generation, strong balance sheets and sizeable cash surpluses.