ICRA Predicts Continued Subdued Growth for Indian IT Services

New Delhi, Sep 11 (KNN) The Indian IT services sector is poised to witness another year of subdued revenue growth, with expectations of only a 4-6 per cent increase in FY2025, according to a report by ICRA.

This marks the second year of muted expansion for the industry, which has been grappling with macroeconomic challenges and reduced discretionary spending by clients in its key markets—the US and Europe.

Despite these challenges, the operating profit margin (OPM) of Indian IT firms is projected to remain robust at approximately 22 per cent for FY2025. A significant factor contributing to this stability is the easing of wage inflation and a reduction in attrition rates, which have now stabilised at an expected 12-13 per cent for the fiscal year.

"The slowdown in attrition, coupled with strong operational efficiencies, is expected to bolster the profitability of the sector," said Deepak Jotwani, Vice President and Sector Head of Corporate Ratings at ICRA.

In FY2024, Indian IT firms recorded only a modest 5.5 per cent revenue growth in USD terms, down from 9.2 per cent in FY2023. This slowdown is attributed to persistent economic uncertainties in key markets, higher inflation, and rising interest rates, which have prompted clients to defer large-scale discretionary technology projects in favor of business-critical ones.

However, despite the reduced revenue conversion, companies maintain a strong order book and deal pipeline, which could fuel growth once the current macroeconomic headwinds subside.

While the US continues to be the largest market for Indian IT firms, accounting for 55-60 per cent of revenues in Q1 FY2025, Europe has shown greater resilience in growth despite facing similar challenges. The rest of the world (RoW) markets have contributed the remaining revenues.

ICRA also highlighted the increasing prominence of generative AI (Gen-AI) within the sector. While revenue from Gen-AI solutions remains limited at present, Indian IT companies are ramping up their capabilities, and the adoption of Gen-AI is expected to be a key growth driver over the medium to long term.

On the hiring front, the sector has seen negative net addition over the last seven quarters as companies optimize excess manpower added during FY2023. However, the decline in headcount has slowed, and hiring is expected to remain muted until growth rebounds significantly.

ICRA maintains a stable outlook for the industry, emphasising that strong balance sheets, healthy earnings, and robust cash flows will continue to support the financial health of Indian IT services companies in the foreseeable future.

(KNN Bureau)