Global Headwinds Will Have Significant Effect On IT Revenue Growth In FY24: Crisil

Global macroeconomic and financial sector headwinds are expected to have a significant impact on domestic IT companies' revenue growth in FY24, according to a study released on Friday.

According to Crisil Ratings, revenue growth in the Rs 10 lakh crore sector is expected to fall by up to 9 percentage points to 10-12 per cent in FY24, down from nearly 20 per cent in FY23.

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

The BFSI segment, which has seen a lot of stress since the Silicon Valley Bank collapse, will see revenue growth cut in half to the mid-single digits, according to the agency, but this will be offset marginally by 12-14 per cent growth in the manufacturing segment and 9-11 per cent growth in other segments.

Nasscom, the IT industry lobbying organisation, has discontinued its practice of forecasting revenue growth for the next fiscal year. The sector, which directly employs over 50 lakh people, has recently seen several changes, including some top firms reporting a decrease in head count.

The rating agency, which examined data from 17 firms that account for 71 per cent of the Rs 10.2 lakh crore Indian IT sector revenue, stated that the last two fiscal years have been among the best for the industry, with a 19 per cent increase in FY22.

The demand scenario will be supported in the future by healthy growth in cost-cutting deals, as well as powerful digital solutions, cloud, and automation capabilities and a diverse variety of offerings, according to the report.

Client IT spending is shifting away from discretionary spending and towards cost-cutting and vendor mergers, according to the agency.

According to the report, the banking, financial services, and insurance (BFSI) segment accounts for 30 per cent of the sector's revenues, followed by retail and consumer packaged goods (15 per cent), with the balance contributed almost equally by life sciences and healthcare, manufacturing, technology and services, communication and media and others.

Operating profitability will rise by 0.50-0.60 per cent to 23 per cent in FY24, as cautious IT service firms cut back on new hires and reduce employee costs.

Operating profit margins are anticipated to fall to a decadal low of 22-22.5 per cent in FY23 due to higher employee costs, which account for 70 per cent of total costs, according to the agency.

It added that other factors such as optimal on/offshore employee mix, manpower training and utilisation, and rupee depreciation will help the firms deliver a 0.50 to 0.60 per cent improvement in operating profit margins to 23 per cent in FY24, but it will still be lower than the pre-pandemic average of 24 per cent seen between FY16 and FY20.

According to the agency, the credit quality of Indian IT firms will be stable, but a significant rupee appreciation and sharp recessionary trends are factors to look out for.