Global headwinds to deeply impact IT revenue growth in FY24: Crisil Ratings

“Headwinds in key markets, especially the BFSI (banking, financial services and insurance) segment in the US and Europe, will affect the revenue growth of domestic IT services companies,” it’s senior director Anuj Sethi said.

The BFSI segment, which has seen quite a few instances of stress after the Silicon Valley Bank collapse, will see revenue growth getting halved to mid-single digit, the agency said, adding that this impact would be marginally offset by 12-14% growth in the manufacturing segment and 9-11% growth in other segments.

IT Industry lobby grouping Nasscom has ceased its practice of giving a revenue growth estimate for the next fiscal. The sector, which supports over 50 lakh people directly, has witnessed a slew of changes lately including some top companies reporting a decline in head count.

The rating agency, which analysed data from 17 companies which account for 71% of the Rs 10.2 lakh crore Indian IT sector revenue, said the last two fiscals have been one of the best for the industry as it had put out a 19% growth in FY22.

Going ahead, healthy growth in cost-optimisation deals, along with strong digital solutions, cloud, and automation capabilities, and a wide range of offerings will support the demand scenario, it said.

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IT spends by clients are witnessing a shift towards cost optimisation and vendor consolidation away from discretionary spends by most end-user industries, the agency said. The banking, financial services and insurance (BFSI) segment accounts for 30% of the sector’s revenues, followed by retail and consumer packaged goods with 15% with the balance almost equally contributed by life sciences and healthcare, manufacturing, technology and services, communication and media, and others, it said.

Operating profitability will see a modest improvement of 0.50-0.60% to 23% FY24, as the cautious IT service firms cut back on new hiring and rein in employee costs.

The operating profit margins are expected to moderate 1.50-1.75% in FY23 to a decadal low of 22-22.5% due to higher employee costs, which form 70% of the total cost, the agency said.

Attritions have begun to come off in recent quarters and are expected to moderate further, it said, adding that other factors like optimum on/offshore employee mix, manpower training/utilisation and benefits of rupee depreciation will help the firms deliver a 0.50-60% improvement in operating profit margins to 23% in FY24, but it will still be below pre-pandemic average of 24% seen between FY16-FY20.

The credit quality of Indian IT companies will be stable, the agency said, adding a significant rupee appreciation and sharp recessionary trends are factors to watch out for.