Indian IT sector likely to see double-digit revenue growth

Despite growth moderation, Indian IT sector will be able to sustain a double-digit growth rate of 12-13 per cent in the current financial year. In a note Crisil Ratings said, this growth will be driven by digitalisation, strong demand for new-age technologies, and depreciation in the rupee among others.

However, the revenue growth rate was way below 19 per cent that was clocked in FY22, which was the highest in the past eight years. Last fiscal's growth rate was supported by various digital transformation initiatives that were taken up by enterprises owing to the Covid pandemic.

According to the rating agency, expected tightening of IT expenditure by corporates amid the inflationary headwinds in the US and European Union (EU), which together contribute almost 85 per cent to the sector's revenue are the reasons for moderation in growth rate in FY23.

On the operating profitability front, Crisil Ratings noted that it would remain healthy, but could fall back a tad to the pre-pandemic low of 22-23 per cent as compared to around 24 per cent last fiscal owing to rising employee cost and increasing travel expenses.

"The operating profitability will moderate to the pre-pandemic lows of 22-23 per cent given the rising employee costs, both to retain talent amid high attrition and maintain a larger employee base. In fact, net employee addition by tier-1 players was at an all-time high of 2.7 lakh last fiscal amid high attrition, which peaked to about 21 per cent in the fourth quarter of the fiscal from 10 per cent a year ago. Besides, revival in international travel and higher discretionary costs will also weigh on operating profitability," said Tanvi Shah, Associate Director, Crisil Ratings.

The rating agency said while key vertical like BFSI (banking, financial services and insurance), which has a revenue share of 30 per cent of most IT firms, will continue to grow at optimum rate; verticals like retail, manufacturing, & telecom may see growth headwinds this fiscal year.

"Almost 75 per cent of revenue of the Indian IT services sector comes from the BFSI (about 30 per cent), retail, manufacturing, and telecom (about 15 per cent each) verticals. Revenue growth from BFSI will remain healthy at 15-17 per cent this fiscal, versus 18 per cent last fiscal, despite the increasing interest rates, backed by rising digital transactions, predictive analytics, cloud and data security," the report said.

"However, corporates in the retail, manufacturing and telecom verticals are expected to tighten IT spending amid the highest inflation rates in the past two decades in the key US and EU markets. Hence, revenue growth from these verticals is seen moderating to 11-13 per cent this fiscal from 15-17 per cent last fiscal," the report noted.

However, the rating agency cautioned against the likely slowdown in western economies impacting the overall IT spend by businesses.

"Rising inflationary headwinds in key client countries may spur corporates to curb discretionary spending and moderate revenue growth over the medium term," Aditya Jhaver, Director, Crisil Ratings noted.