A report by Icra says that the Indian IT services industry remains cautious of the macroeconomic headwinds in key markets of the US and Europe, which if intensify, could moderate growth over the medium term.
The agency noted that in terms of geographic split of revenues, the Indian IT industry generates a lion’s share from the US, followed by Europe and the rest of the world (RoW). Icra's sample set of 11 leading IT services companies resonates with this trend and generated about 61 per cent of its FY2022 revenues from the US, approximately 26 per cent from Europe and 13 per cent from the RoW.
“Thus, the industry remains susceptible to macroeconomic uncertainties and any adverse regulatory changes in its key operating markets of the US and Europe,” Icra observed.
ICRA said that the operating margins for the sample set had moderated by 200-250 bps on a year-on-year (YoY) basis in H1 FY2023 due to continued wage cost inflation and normalisation of operational overheads in Indian IT services.
Meanwhile, wage cost inflation is likely to start tapering from the end of the current fiscal; margins will remain susceptible to any moderation in business performance due to macroeconomic headwinds, said the credit rating agency.
“ICRA maintains its Stable outlook on the sector as the credit profile of Indian IT services companies remains comfortable, supported by healthy internal accrual generation and strong balance sheets,” the report said.
Despite ongoing geo-political developments and increasing inflationary pressure, YoY growth in revenues from Europe for the sample set in H1 FY2023 in CC terms has been comparatively more resilient against that from the US market.
ICRA's sample set reported YoY revenue growth of 19.4 per cent from Europe in CC terms in H1 FY2023, matching the growth in FY2022. In contrast, YoY growth over the same period in INR terms for the sample set was lower at about 14.5 per cent (versus 21.3 per cent YoY growth in FY2022) due to considerable appreciation of the INR against the GBP and Euro.