The Indian IT services sector is bracing for another year of subdued growth, with projected revenue increases of only 5-7 per cent in fiscal year 2025, according to a recent report by Crisil Ratings.
This follows a period of slowdown where the sector grew by 6 per cent in FY24, a sharp decline from a 12 per cent compound annual growth rate over the previous decade. The report attributes the restrained growth projections to ongoing global economic challenges that have curtailed technology spending in the sector's primary markets, particularly the US and Europe.
Crisil's analysis, which covers the top 24 firms making up about 55 per cent of the sector's revenue last fiscal year, suggests that the anticipated recovery in the second half of FY25 is unlikely to materialise as expected. This outlook is even more conservative than the revenue guidance provided by Infosys, one of the sector's leading companies, which anticipates growth of just 1-3 per cent.
Despite the bleak revenue growth outlook, the report forecasts that operating margins will hold steady at 22-23 per cent. This stability is expected to be supported by stringent management of employee expenses, cautious hiring practices, and reduced attrition rates, which alleviate the cost of hiring and training new staff.
Different sectors within the IT services landscape are experiencing varying growth dynamics. The banking, financial services, insurance, retail, technology, and communications sectors are all predicted to see low, single-digit growth rates. In contrast, the manufacturing and healthcare sectors, each accounting for about 10 per cent of the sector’s revenue, are expected to witness more robust growth rates of 9-10 per cent, driven by ongoing investments in process automation and R&D-based analytics.
The report also highlights that the IT service companies have reduced their workforce by 4 per cent as of December 2023 and witnessed a decline in attrition rates to about 13 per cent from 20 per cent in the previous fiscal year. These measures are part of broader efforts to maintain efficiency and manage costs effectively in a challenging economic environment.
Despite the current hurdles, the medium-term outlook for the sector remains promising. IT service providers continue to secure contracts and are increasingly integrating Gen AI-based services into their offerings. The sector is also keen on acquisitions, particularly targeting small to mid-sized companies that can enhance their digital capabilities and expand their product offerings.
However, Crisil Ratings cautions that risks such as a potential appreciation of the rupee and prolonged economic recovery delays in key markets due to ongoing geopolitical conflicts need close monitoring.
