IT outlook: The Indian IT services industry is expected to see modest growth of 3-5 per cent in revenue terms in the 2025 fiscal, credit rating agency ICRA said on March 18. 

While margins for Information Technology (IT) companies in India are expected to improve mildly from 2 per cent in the nine months of FY2024, the revenue growth for the sector will likely remain tepid in FY2025, ICRA said in a statement.

“ICRA expects revenue growth (for its sample set companies) in FY2025 to remain tepid at close to 3-5 per cent for the second consecutive year, given the persistent macro-economic headwinds in key markets of the US and Europe, resulting in lower discretionary IT spends by corporates. The impact is broad-based across all key sectors serviced by the industry,” Deepak Jotwani, Assistant Vice President & Sector Head at ICRA said.

Notably, the banking, financial services and insurance (BFSI) and telecom segments have contracted more than the others, Jotwani added.

Critical spending and cost optimisation deals continue to gain traction, he further said, which supports growth prospects for the Indian IT services companies to some extent. 

“Despite expectations of muted topline growth, ICRA expects the operational performance management (OPM) for the companies to remain healthy at about 21-22 per cent in FY2025, supported by their ability to optimise operational efficiencies as well as stabilisation of wage costs,” he added.
 

In an assessment of 16 IT service companies, ICRA said hiring activity in the industry has remained muted over the past five quarters.

The assessed companies saw a reduction, or net negative addition on the back of moderate demand, as well as the companies increasingly deploying the resources hired in the 2023 fiscal.

This also resulted in a steady decline in attrition over the 12-month period for the sample set companies, over the last five quarters.

“ICRA expects hiring to remain muted in the near term with gradual pick-up until the growth momentum improves. Moreover, attrition levels are expected to stabilise over the near term, inching closer to the long-term average of 12-13 per cent, as overall slowdown in growth momentum and strong hiring in the previous fiscal has corrected the demand-supply mismatch witnessed earlier,” Jotwani noted.

In terms of geographical growth, the US witnessed a sharper moderation as compared to the European region.

Even as revenue conversion of the orders slowed down, most companies saw a strong order book and deal pipeline. This was due to evolving consumer demand dynamics after the pandemic, which have made technology spend even more crucial for corporates in terms of overall capital allocation.

The growth momentum is also expected to pick up after macroeconomic headwinds subside, ICRA said.

The financial profile of majority of the industry players is also expected to remain strong in IT services despite ongoing and significant dividend pay-outs or share buybacks and inorganic investments.

This is on the back of strong cash flow generation, lower debt levels and strong liquidity.

ICRA has maintained a Stable outlook on the Indian IT services industry on the back of a well-established business position, expectations of healthy earnings and cash flow generation, and strong balance sheets of the industry players.