Indian IT services sector prepares for another year of sluggish revenue growth amid global economic challenges

The Indian IT services sector is bracing for another year of sluggish revenue growth, with projections hovering at 5-7 per cent for the fiscal year 2025, according to a report released on Wednesday. This comes on the heels of a 12 per cent compound annual growth over the past decade, and a modest 6 per cent year-on-year growth expected for fiscal 2024, as detailed in a recent study by Crisil Ratings.

Economic challenges

Despite a decade of robust growth, the Indian IT services sector is facing headwinds from global macroeconomic factors, contributing to a sustained period of subdued revenue expansion. The report highlights a decline in technology spending, which is expected to persist through the current fiscal year, further impeding the revenue growth trajectory of IT service providers.

Impact on workforce dynamics

The slowdown in revenue growth has prompted IT service companies to exercise caution in talent acquisition, leading to a 4 per cent reduction in headcount compared to the previous year. However, there has been a notable decrease in attrition rates, dropping to 13 per cent by December 2023 from a high of 20 per cent in the previous fiscal year, which has mitigated the need for costly replacement hiring during fiscal 2024.

Sectoral analysis

According to Aditya Jhaver, Director at CRISIL Ratings, revenue growth in the banking, financial services, and insurance (BFSI) and retail segments is expected to remain subdued, hovering around 4-5 per cent. Conversely, sectors like manufacturing and healthcare are anticipated to experience healthier growth rates of 9-10 per cent.

Key revenue drivers

The report identifies automation and cost optimisation as focal points for IT spending, with most end-user industries likely to defer large discretionary expenditures. The top four sectors contributing to 65 per cent of the sector's revenue include banking, financial services, and insurance (BFSI), retail, technology, and communications and media.

Maintaining margins

Despite the revenue challenges, operating margins are projected to remain stable at 22-23 per cent. This sustainability is attributed to prudent management of employee costs, which constitute 85 per cent of total expenses, through cautious hiring practices and reduced attrition rates, thereby minimising replacement costs.

As the Indian IT services sector braces for a second year of muted revenue growth, companies are expected to navigate through ongoing economic challenges by prioritising efficiency, cost optimisation, and strategic investments in key growth areas.