Indian IT services sector set to grow at 3-5% in FY25: ICRA

The Indian IT services industry is expected to experience sluggish growth due to uncertain macroeconomic conditions in markets like the U.S. and Europe. According to a report released by ICRA on Monday, the industry is projected to see a mild revenue increase of 2% in the first three quarters of FY24, with growth remaining modest at 3-5% in FY25. This marks the second consecutive year that ICRA has forecasted a growth rate in the 3-5% range for the IT sector.

Deepak Jotwani, assistant vice-president & sector head at ICRA, says, “ICRA expects revenue growth (for its sample set companies) 1 in FY2025 to remain tepid at ~3-5% for the second consecutive year, given the persistent macroeconomic headwinds in key markets of the US and Europe, resulting in lower discretionary IT spends by corporates. Moreover, despite expectations of muted topline growth, ICRA expects the OPM (operating profit margin) for the sample set companies to remain healthy at ~21-22% in FY2025, supported by their ability to optimise operational efficiencies as well as stabilisation of wage costs.”

While the impact is widespread across all major sectors served by the industry, the banking, financial services, and insurance (BFSI) as well as telecom segments have seen more significant contractions, as per Jotwani. The report also noted a slowdown in growth in the US compared to Europe, although companies maintain strong order books and deal pipelines despite slower revenue conversion.

Major IT services firms have reported substantial total contract values, with Tata Consultancy Services (TCS) reporting a total contract value (TCV) of $8.1 billion in the third quarter of FY24. However, hiring in the industry has been subdued due to lower demand and increased utilisation of existing capacity from the previous financial year.

In line with subdued demand prospects, hiring activity in the industry has remained muted over the past five quarters, with negative net addition for the sample set companies because of moderation in demand, coupled with the increase in utilisation of excess capacity added in FY2023.

“ICRA expects hiring to remain muted in the near term with gradual pick-up until the growth momentum improves. Moreover, attrition levels are expected to stabilise over the near term, inching closer to the long-term average of 12-13%, as overall slowdown in growth momentum and strong hiring in the previous fiscal has corrected the demand-supply mismatch witnessed earlier,” Jotwani added.

Despite dividend payments, share buybacks, and investments, ICRA foresees a strong financial profile for most industry players, supported by robust cash flow generation, low debt levels, and ample liquidity.