Indian IT services sector to see muted revenue growth of 4-6% in FY25: ICRA

The Indian IT services sector is expected to see a modest revenue increase of 4-6% in FY2025, marking its second year of tepid performance, according to ratings agency ICRA. The subdued growth is attributed to reduced discretionary spending on technology amid persistent macroeconomic uncertainties in major markets like the U.S. and Europe.

Despite these odds, ICRA expects the industry's operating profit margin (OPM) to remain robust at approximately 22% in FY2025, aided by reduced wage cost inflation and enhanced operational efficiencies. In the previous fiscal year, the sector saw a modest revenue growth of 5.5% in dollar terms for FY2024. “Revenue growth for the Indian IT services companies has remained tepid in the last five-six quarters as the industry continues to face challenges from macroeconomic headwinds in key markets. Accordingly, ICRA’s sample set companies recorded a modest YoY growth of ~5.5% in revenues in USD terms in FY2024, against 9.2% in FY2023,” ICRA states.

The U.S. market, which accounts for 55-60% of the sector’s revenue, remains a key factor, though recent slowdowns have impacted growth due to increased macroeconomic pressures. In contrast, Europe has demonstrated more resilient growth. “ICRA’s sample set companies generated 55-60% of its Q1 FY2025 revenues from the US, 22-25% from Europe, and the balance from the RoW markets,” it adds.

ICRA report highlights that, although most IT services companies maintain strong order books and deal pipelines, revenue conversion has experienced a slowdown. This slowdown, combined with a greater emphasis on cost optimisation and essential projects, has resulted in muted hiring within the sector.

The attrition rates of the Indian IT sector have dropped significantly, from 23.2% in Q2 FY2023 to 13.1% in Q1 FY2025, says Deepak Jotwani, vice president & sector head – Corporate Ratings at ICRA. Although recent net additions have been negative, hiring is likely to remain subdued until growth picks up significantly. ICRA expects attrition levels to stabilise at a long-term average of 12-13% in FY2025.

“ICRA expects FY2025 to be the second consecutive year of muted revenue growth, estimated at 4-6%, given the lower discretionary technological spends by clients amidst persistent macro-economic uncertainty,” Jotwani adds.

ICRA notes that leading Indian IT services companies have trained a significant portion of their workforce in Gen-AI skills. “Leading Indian IT services companies have already started ramping up their capability and service offerings, to deliver AI-based solutions to their clients. While the order book or revenue contribution from Gen-AI deals so far is limited, it is likely to pick up over the medium term as overall technology adoption is more pervasive,” the report adds.