At 5-7%, IT service companies face muted revenue growth for 2nd year

With India’s technology industry showing resilience amidst economic challenges and expectation of modest recovery in FY25, the first quarter of Q1 2024 (January – March) witnessed notable deal activity, especially in mergers and acquisitions (M&A), indicating growth prospects in vendor consolidation and transformation projects. A report by CRISIL Ratings shows optimistic market sentiment as the tech industry in India, estimated at USD 254 billion, showed resilience in FY2024 achieving a 3.8 per cent year-on-year growth compared to 8.1 per cent in FY 2023.

Despite growth concerns, a modest FY2025 recovery is anticipated, with lingering challenges in H1 FY25 due to cautious spending. Demand revival is expected to be gradual, aided by conducive monetary policies and increased private capital expenditure targeting new markets and innovations.

The M&A activity experienced a notable resurgence, witnessing a significant 46 per cent rise in volumes and a remarkable 6x increase in values, resulting in a higher average ticket size of USD 11.3 million, up from USD 2.8 million in the previous quarter.

Despite tough market conditions and reduced hiring, the tech industry added 60,000 employees, totalling 5.43 million, a 1.1 per cent year-on-year growth in FY2024. It is expected to maintain headcount status quo, but FY2025 is likely to see marginal improvement with stabilised macroeconomics and rationalised overcapacity.

The IT services sector is likely to see a second consecutive year of sluggish growth in fiscal 2025, with revenue seen rising 5-7 per cent, as continuing global macroeconomic headwinds lead to modest increase in technology spends in the key markets of the US and Europe. This follows a 12 per cent compound annual growth over the decade through fiscal 2024 and 6 per cent on-year growth expected for fiscal 2024.

Operating margin, however, should sustain at 2223 per cent due to prudent management of employee costs (constitutes 85 per cent of total expenses and includes sub-contracting costs), through cautious hiring and with lower attrition reducing replacement cost. A CRISIL Ratings study of the top 24 firms, accounting for 55 per cent of the Rs 14 lakh crore sectoral revenue last fiscal, indicates as much.

Four sectors account for 65 per cent of the revenue of the Indian IT services sector. Banking, financial services and insurance with revenue share of 30 per cent), retail with share of 15 per cent, technology with share of 10 per cent and communications and media with share of 10 per cent. Technology spend in these sectors saw muted growth in low single digits in fiscal 2024, amid high interest rates4 and economic slowdown in key markets.

Manufacturing and healthcare segments (revenue share of 10 per cent each) were the only bright spots, with continued double-digit growth in tech spend, given the focus on process automation and research and developmentbased analytics, especially in healthcare. Says Aditya Jhaver, Director, CRISIL Ratings, “The slowdown in technology spend will continue this fiscal, weighing on the revenue growth of IT service providers. Revenue from BFSI and retail segments will continue to be a drag with subdued growth of 4-5 per cent while manufacturing and healthcare will grow at a healthy 9-10%.

IT spends will remain focused on automation and optimising costs, while most end-user industries are likely to defer large discretionary spends.”