IT firms’ revenue growth may drop to mid-single digit in FY24

A 31 March report by analytics and ratings firm Crisil projected a drop of 700-900 basis points in revenue growth rate in FY24. The drop in revenue growth will follow a “strong 18-20% growth expected in FY23, accentuated by a sharp depreciation of 7-8% in the rupee, and 19% in FY22,” the report said.

Anuj Sethi, senior director at Crisil, said revenue growth from the banking, financial services and insurance (BFSI) sector may reduce to “mid-single digit” — the key factor that could pull down revenue growth in IT firms. “However, it would be marginally offset by 12-14% growth in the manufacturing segment, and 9-11% growth in other segments,” Sethi noted.

The BFSI sector contributed nearly 30% of the ₹10.2 trillion revenue earned by Indian IT services firms as of FY22.

Others, too, expect the IT industry’s overall growth pace to plunge to mid-single digit. Apurva Prasad, vice-president of institutional research at HDFC Securities expects the revenue growth rate “in the low teens” in FY23 — a figure that is likely to fall to “mid to high single-digit” in FY24.

A 31 March report on the domestic IT sector by financial services firm Motilal Oswal said slowdown in discretionary spends in more sectors such as “hi-tech, manufacturing and retail” could fuel a slowdown starting from the March quarter of 2023.

According to Motilal Oswal, the sector could face cuts in discretionary expenses as companies will “focus on cost efficiency work” and “increased vendor consolidation deals”.

However, while such deals could bolster the total contracted value (TCV) of deals signed by IT firms in FY24, it may not offset revenue growth. HDFC’s Prasad said an early example of this was seen in Dublin-based IT giant Accenture’s latest earnings call. “Accenture reported a 32% annual growth in outsourcing contracts. But, it’s important to note that most of these cost optimization deals will come with higher durations, so there will be a disconnect between the number of deals signed — which would be higher — versus the revenue growth rate, which would be lower,” he said.

Cost optimization deals are combinations of vendor consolidation and offshoring businesses — and are mostly non-discretionary in nature.

“For example, this means putting a pause on projects around metaverse deployments. Most of these deals would come by targeting better returns on investments in the near-term, and in turn, conserve cash. This can also see companies consolidate the number of vendors that they have, and also focus on getting lower priced deals,” Prasad added.

The slowdown in revenue growth is likely to also come at an inflection point for operating margins of companies. While HDFC’s Prasad said operating margins are expected to improve based on lower attrition and easier employee cost, Akshara Bassi, research analyst at Counterpoint India, added that margins could come under pressure if the macroeconomic conditions do not improve by the September quarter.

Aditya Jhaver, director of Crisil, added that companies will “focus on utilization than advance hiring, supported by low attrition.” On 24 January, Mint reported that Indian IT firms are likely to turn to benched employees amid market uncertainty, to consolidate cost.