Indian IT services industry's growth pace may slow down in near to mid term: ICRA

The growth momentum of Indian IT services industry is likely to slow down in the near to mid term as macroeconomic headwinds trigger lower discretionary IT spends, ICRA said on Monday.

Ratings agency ICRA sees lower hiring by the IT service companies in the near term given that excess capacities were added in FY2022 and expects moderation in demand compared to previous fiscals amid macroeconomic headwinds.

Indian IT services companies have witnessed a moderation in growth in the last two quarters in constant currency terms owing to the base effect and evolving macroeconomic headwinds in key markets of the US and Europe.

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Due to these headwinds, the decision-making towards discretionary IT spending has seen a slight deferment, while the cost optimisation deals continue to generate stable demand, it noted.

"Growth momentum for the Indian IT services industry likely to slow down in the near to medium term," ICRA said in a statement.

The slowdown is on account of evolving macroeconomic headwinds leading to lower discretionary IT spending.

It estimated that operating profit margins will moderate owing to wage cost inflation and normalisation of operational overheads partially offset by currency gains.

ICRA's sample set of leading IT services companies reported a year-on-year revenue growth of 18.4 per cent in Rupee terms and 9.9 per cent in dollar terms in nine months of FY2023, against about 17-18 per cent YoY growth in USD terms in FY2022.

In terms of the segment-wise trend, growth in the BFSI (banking, financial services and insurance) segment, one of the key segments for IT companies, has tapered compared to the other segments in recent quarters. This is partially attributable to lower lending activity.

"Moreover, if the macroeconomic headwinds persist, the mortgage lending and the retail segments are expected to witness relatively higher moderation in growth, compared to the manufacturing and the healthcare segments," according to ICRA.

The industry is also grappling with high employee attrition in recent times, led by the demand-supply gap, especially for digital tech talent.

However, the attrition is on a declining trend from the last two quarters and ICRA expects attrition to further decline over the next two-three quarters before stabilising, supported by a strong hiring in FY2022, which has addressed the demand-supply mismatch to an extent.

"ICRA expects lower hiring by the IT service companies in the near term because of excess capacity added in FY2022 and expected moderation in demand compared to previous fiscals owing to the macroeconomic headwinds," Deepak Jotwani, Assistant Vice President and Sector Head at ICRA, said.

Despite expectation of slowdown in growth momentum, ICRA maintains its stable outlook on the Indian IT services industry supported by its cost competitiveness, growing demand for IT services (including digital and cloud services) and healthy credit profile of industry participants.