IT sector revenue growth expected to plunge to mid-single digit in FY24

Macroeconomic headwinds could play spoilsport for Indian information technology (IT) services firms this quarter, leading to a slowdown in revenue growth for most companies. According to industry stakeholders, a slowdown in the banking and financial services sectors in the US, and greater caution in discretionary tech expenses globally, may lead to a  drop of around 700 basis points in the revenue growth rate, next financial year.

A March 31 report by Mumbai-based analytics and ratings firm Crisil projected a drop of 700-900 basis points in the revenue growth rate in FY24. The drop in revenue growth will follow a “strong 18-20% growth expected in FY23, accentuated by a sharp depreciation of 7-8% in the rupee, and 19% in FY22,” the report said.

Anuj Sethi, senior director at Crisil, said in the report that revenue growth from the banking, financial services and insurance (BFSI) sector may reduce to “mid-single digit” — the key factor that could pull down revenue growth in IT firms. “However, it would be marginally offset by 12-14% growth in the manufacturing segment, and 9-11% growth in other segments,” Sethi noted.

The BFSI sector contributed nearly 30% of the ₹10.2 trillion revenue earned by Indian IT services firms in India, as of FY22.

Others, too, expect the overall industry’s growth pace to plunge to mid-single digit. Apurva Prasad, vice-president of institutional research at financial services firm HDFC Securities added that the revenue growth rate is expected to be “in the low teens” in FY23 — a figure that is likely to fall to “mid to high single-digit” in FY24. Prasad’s estimate marked a similar revenue growth slowdown expectation in the upcoming year, a factor that he attributed to the present economic uncertainties owing to the weak macroeconomic conditions.

A March 31 report on the domestic IT sector by financial services firm Motilal Oswal said that slowdown in discretionary spends in more sectors such as “hi-tech, manufacturing and retail” could fuel a slowdown stemming from the March quarter, i.e. Q4FY23.

Motilal Oswal’s report added that cutting down discretionary expenses is expected to take place as companies will “focus on cost efficiency work” and “increased vendor consolidation deals”.

However, while such deals could beef up the total contracted value (TCV) of deals signed by IT firms in FY24, the same may not offset revenue growth. HDFC’s Prasad said that an early example of this was seen in Dublin-headquartered IT firm Accenture’s latest earnings call. “Accenture reported a 32% annual growth in outsourcing contracts. But, it’s important to note that most of these cost optimization deals will come with higher durations, so there will be a disconnect between the number of deals signed — which would be higher — versus the revenue growth rate, which would be lower,” he said.

Cost optimization deals are combinations of vendor consolidation and offshoring businesses — and are mostly non-discretionary in nature.

“For example, this means putting a pause on projects around metaverse deployments. Most of these deals would come by targeting better RoIs in the near-term, and in turn, conserve cash. This can also see companies consolidate the number of vendors that they have, and also focus on getting lower priced deals,” Prasad added.

The slowdown in revenue growth is likely to also come at an inflection point for operating margins of companies. While HDFC’s Prasad said that operating margins are expected to improve based on lower attrition and easier employee cost, Bassi added that margins could come under pressure if the macroeconomic conditions do not improve by the September quarter.

Aditya Jhaver, director of Crisil, added that companies will “focus on utilization than advance hiring, supported by low attrition.” On January 24, Mint reported that domestic IT firms are likely to turn to benched employees amid market uncertainty, to consolidate cost.