In a recent report, domestic rating agency Icra has projected a further deceleration in the revenue growth of Indian IT companies, which are already grappling with headwinds in the industry. The nearly USD 250 billion sector is expected to witness a slowdown to mid-single digits, placing significant pressure on the sector’s stability and prospects.
The challenges faced by the industry are likely to extend their impact on hiring as well. Icra anticipates that companies will soon maintain “low levels” of employee additions. This sobering forecast comes from two consecutive quarters of negative net employee additions in FY23, highlighting the impact of prevailing uncertainties.
The slowdown in the IT sector’s growth trajectory has been evident in recent years. According to a report by Nasscom, the industry’s growth rate dipped to 8.4 per cent in FY23 from a robust 15 per cent in the previous fiscal. Even though Indian IT services companies boast a solid order book and promising deal pipelines, Icra believes that revenue growth will remain lacklustre in the coming fiscal year.
Icra’s outlook, however, remains stable for companies operating within the sector. These companies are generally acknowledged for their strong leverage positions and financial resilience, which help them weather challenging market conditions.
The agency identifies macroeconomic headwinds in the United States and Europe as the primary contributors to the growth slowdown witnessed in the last two quarters. These regions account for up to 90 per cent of the industry’s revenues, making their stability crucial for sustained growth in the sector.
The banking, financial services, and insurance segment, which constitutes a significant portion of the sector’s revenues, experienced a more pronounced decline than other components. The crisis in American banks has severely affected growth in this particular sector.
Moreover, the industry needs to improve its decision-making by customers, resulting in a sluggish conversion of deals into revenues. These factors collectively exacerbate the challenges faced by Indian IT companies, contributing to the overall slowdown in the sector.
Although the operating profit margins of companies in Icra’s sample set narrowed by 1.90 per cent to 22.9 per cent in FY23, the agency anticipates these margins to remain steady despite the deceleration in revenue growth.
The impact of the sector’s struggles also s evident in the employment landscape. The top five companies in the IT sector added only 83,906 employees in FY23, a substantial decline from the 2.73 lakh employees added in FY22. With macroeconomic uncertainties persisting, Icra suggests that hiring levels will continue subdued in the foreseeable future.
As the Indian IT sector braces for a further slowdown in revenue growth and a challenging hiring environment, companies must adapt and explore innovative strategies to navigate these troubled waters.
