IT Sector Growth To Inch Up To 6% In FY25, Hiring To Be Moderate For 3 Quarters: ICRA

Domestic rating agency Icra on Monday said the Indian IT sector's revenue growth will inch up to over 6% in 2024-25 from 3-5% estimated for the ongoing financial year.

The slower growth will have an impact on the hiring plans, the agency said, adding that staff addition will continue to remain "muted" for the next 2-3 quarters. The $250-billion industry grew by 9.2% in FY2022-23.

The muted hiring outlook is the result of a weak demand scenario and companies will be focusing on utilising the capacity in the past and improving the overall utilisation levels, the agency said.

It explained that the macroeconomic challenges in the biggest markets of the U.S. and Europe have caused a slowdown in demand.

The increased hiring in the recent past inflated the overall wage bills of companies and impacted the operating profit margins, but the same is likely to improve over the medium term as the wage costs stabilise and employee utilisation goes up.

The agency said attrition has tapered in the last few quarters after rising up as there was higher demand for workers during the time of high demand for the sector's services.

ICRA further stated that the revenue growth from the US (58-60% of the industry's revenues) witnessed a sharp moderation in recent quarters as macroeconomic headwinds continued to intensify coupled with instability in the banking sector in the U.S., which is a key vertical for the Indian IT services companies, leading to lower technological spending, specially towards discretionary and non-critical transformation programmes.

The growth in Europe has also witnessed moderation, though it has remained more resilient compared to the U.S. in the last few quarters, supported by healthy deal execution in the U.K. as reported by some of the industry players, it noted.

Covid-19 pandemic-induced accelerated demand for digitisation led to considerable demand-supply gap, especially for digital tech talent in the Indian IT services industry during FY22 and H1 FY23, said the report, adding that consequently, there was a surge in attrition in the industry from the fourth quarter of FY21 to second quarter of FY23.

However, the attrition is on a declining trend since the third quarter of FY23 on the back of excess hiring in FY23 and demand slowdown in the current fiscal, thereby reducing the overall demand-supply mismatch that occurred in the last fiscal, it added.

The report revealed that the employee cost as a percentage of operating income for Indian IT services companies has increased steadily in recent years to 58% in the first half of the current fiscal (H1 FY24), from 54% in FY21, due to lower revenue growth.

ICRA said while this has exerted some pressure on profit margins, major IT services companies have been able to mitigate the impact to some extent through increased operating efficiencies.