CRISIL Report Forecasts Deceleration, India’s Information Technology (IT), companies are anticipated to encounter a deceleration of 7-9% in revenue growth in 2023 in contrast to this year, as a consequence of global macroeconomic and fiscal sector headwinds.
Nonetheless, the IT services domain is predicted to observe a revenue growth of 18-20% in 2022-23, which is expected to diminish to 10-12% in 2024. The discoveries were derived from a comprehensive study of the top 17 IT firms, constituting about 71% of the sector’s revenue in the preceding year.
The primary cause of the drop in revenue is the slowdown in the Banking, Financial Services, and Insurance (BFSI) segment, which is accountable for 30% of the sector’s revenues. The headwinds in prominent markets, mainly in the BFSI segment in the United States and Europe, are projected to influence the revenue growth of indigenous Information Technology services firms. However, there is an expected meager expansion in other segments, such as manufacturing, expected to increase by 12-14%, and other segments, likely to expand by 9-11%.
According to Anuj Sethi, senior director of CRISIL Ratings, “Net-net, there would be moderation in overall revenue growth.” This year, IT companies are expected to witness a moderation of 1.5-1.75% in operating profitability, which is expected to fall to a decadal low of 22-22.5%. This has been attributed to high employee costs, as they form close to 70% of the total cost. However, in 2024, these costs are expected to moderate as companies are now more cautious about hiring. Attrition is also expected to moderate further.
According to Aditya Jhaver, director of CRISIL, “The full impact of the extraordinary hiring of 2022 was felt in 2023, because of which employee cost is estimated to rise by over 20%. Companies are now focusing on utilization rather than advanced hiring, supported by lower attrition. This should lead to a marginal improvement in operating profitability in 2024.” Jhaver also stated that larger companies with agile and diverse capabilities would be better equipped to cater to the changing needs of clients and would, therefore, be insulated from pricing pressure.
Despite the headwinds faced by the IT sector, CRISIL has stated that the credit quality of the sector is expected to remain stable due to continued healthy cash generation, strong balance sheets, and sizable cash surpluses.
In conclusion, the IT sector in India is expected to face headwinds in the near future due to the slowdown in the BFSI segment. However, there is expected to be marginal growth in other segments, and larger companies with diverse capabilities are expected to be insulated from pricing pressure. While the operating profitability of the IT companies is expected to decline in 2023, it is expected to improve in 2024 due to lower employee costs and attrition. Despite the challenges faced by the IT sector, the credit quality of the sector is expected to remain stable.
