The Indian IT services sector is staring at a second consecutive year of muted revenue growth due to modest increase in tech spends in Europe and the US, Crisil Ratings said on April 24.

Crisil Ratings said it expects the sector to grow at 5-7% in FY25, after a growth of 6% estimated to have been achieved in FY24. The overall industry size is pegged at $250 billion and it creates over 50 lakh direct jobs. “The slowdown in technology spend will continue this fiscal, weighing on the revenue growth of IT service providers,” said Aditya Jhaver, director at Crisil.

The industry is expected to sustain in the key metric of profitability, as the operating profit margins will be stable at 22-23%, the agency said, attributing it to prudent management of employee costs.

Crisil said the sectoral revenues achieved a compounded annual growth rate of 12% for the decade through FY24.

BFSI, retail to have subdued growth in FY25

High interest rates and economic slowdown in client markets led to a modest single-digit growth in tech spending by companies in the banking, financial services and insurance (BFSI), retail, technology and communications sectors in FY24, the agency said. It said these four sectors account for nearly two-thirds of the industry’s revenues. Mr. Jhaver said revenue from BFSI and retail segments will continue to be a drag with subdued growth of 4-5% in FY25.

Manufacturing and healthcare, which contribute a tenth of the revenue, were the only bright spots and continued double-digit growth in tech spending given the focus on process automation and research and development-based analytics, especially in healthcare.

As revenue growth remained subdued, IT service companies pulled back on the addition of fresh talent, resulting in headcount reductions by 4% in 2023 by the top 12 companies. This, along with the decline in attrition to 13% as of December 2023 from the high of 20% in FY23 provided a breather by limiting higher-cost replacement hiring during FY24, it said.

Associate director Joanne Gonsalves said the ratings company expects IT service providers to remain “cautious” on fresh hiring in FY25 too, which will maintain employee utilisation at a healthy level of ~85%.

Continued healthy cash generation, strong balance sheets and sizeable cash surplus will keep the credit quality of IT service providers stable, the rating agency said. Players will continue to eye acquisitions, especially small and mid-sized opportunities that could enhance their product baskets and increase digital capabilities, it said.

An appreciation in the rupee value or sustained delay in economic revival in key markets amid ongoing geopolitical conflicts could pose downside risks, it added.