Macroeconomic (macro) concerns, along with a cautious approach towards discretionary information technology (IT) spending, will see the revenue for Indian IT firms decelerate by 5 per cent through 2024-25 (FY25), from the highs of 12-18 per cent in 2022-23, said analysts from S&P Global Ratings.
“The reason behind this slow growth is a macro slowdown.
"Customers are cutting their discretionary IT spending, especially on projects that take longer to deliver quantifiable outcomes.
"We also acknowledge that there are still strong economic headwinds for the next few years,” said Spencer Ng, associate director, corporate ratings, S&P Global Ratings, over a call in a media briefing.
The other reason for the drop in revenue growth was the exposure to the banking sector.
About 20-35 per cent of the revenue of the Indian IT sector comes from the banking, financial services and insurance sector, and it generates about 80-90 per cent of its revenue from the US, the UK, and European markets.
S&P Global Ratings believes there is still significant uncertainty about how these markets will perform.
However, the silver lining is that the Indian IT players will continue to grow, and from the client side, migration to Cloud will remain on the agenda because it’s a crucial part of the digitisation efforts.
“Projects that achieve cost-efficiency, vendor consolidation, and Cloud migration, along with long-term partnerships with customers, will bring the much-needed stability among players,” said Ng.
He also pointed out that the revenue growth of market leader Accenture has always been above global gross domestic product growth, even in the previous downcycles.
“When it comes to the top four Indian IT players, of which we rate three, before 2015 they enjoyed tremendous growth because they were capturing market share and improving their capabilities.
"After 2015, their growth tends to be more aligned with Accenture,” he added.
S&P Global Ratings rates the three top IT services players: Infosys, HCLTech, and Wipro.
The rating firm also believes that newer technologies such as generative artificial intelligence (AI) and ChatGPT will see increased investment from Indian IT players, and rather than getting threatened, they will work closely with clients and use these technologies to solve problems.
“We would expect accelerated investments and partnerships in generative AI technology along the way.
"We have already seen some announcements by Indian players launching new offerings using these technologies,” he added.
On margins, which have been an important factor for the sector, S&P expects margins to flatten in 2023-24 (FY24) and improve by 1-1.5 per cent in FY25.
Some of the reasons for the low margins in the past two years are under control, such as falling attrition and salaries, as well as sub-contract billings.
Besides, a higher intake of entry-level graduates will lower the average cost per revenue.
“Indian IT companies face slower growth than they previously anticipated and may struggle in FY24 to improve their utilisation rate of employees.
"Price negotiations with customers and transferring costs will also be increasingly difficult,” observed Ng.