Indian IT Sector Revenue Growth to Inch Up to 6% in 2024-25: Icra

The Indian IT sector is expected to witness a modest increase in revenue growth in the coming years. According to domestic rating agency Icra, the industry's revenue growth will inch up to over 6 percent in 2024-25, compared to the 3-5 percent estimated for the ongoing financial year.

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Slower Growth to Impact Hiring

The slower growth is likely to have an impact on hiring plans in the sector. Icra predicts that staff addition will continue to remain muted for the next 2-3 quarters. The muted hiring outlook is a result of a weak demand scenario and companies will be focusing on utilizing the capacity in the past and improving the overall utilization levels.

Macroeconomic Challenges in Key Markets

The macroeconomic challenges in the biggest markets of the US and Europe have caused a slowdown in demand for IT services. The increased hiring in the recent past inflated the overall wage bills of companies and impacted the operating profit margins. However, the situation is likely to improve over the medium term as the wage costs stabilize and employee utilization goes up.

Declining Attrition Rates

The report also highlights that attrition rates in the IT sector have tapered in the last few quarters after rising sharply during the time of high demand for the sector's services. The excess hiring in FY23 and demand slowdown in the current fiscal have reduced the overall demand-supply mismatch that occurred in the last fiscal, leading to a decline in attrition.

Regional Growth Trends

The revenue growth from the US, which accounts for 58-60 percent of the industry's revenues, witnessed a sharp moderation in recent quarters. This was due to macroeconomic headwinds and instability in the banking sector, a key vertical for Indian IT services companies. The growth in Europe has also witnessed moderation, although it has remained more resilient compared to the US.

Rising Employee Costs

The employee cost as a percentage of operating income for Indian IT services companies has increased steadily in recent years, reaching 58 percent in the first half of the current fiscal H1 FY24. This increase is attributed to lower revenue growth. 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.

The Indian IT sector is facing some challenges in the near future, with slower revenue growth and a weak demand scenario. These factors are likely to impact hiring plans and lead to muted staff addition in the coming quarters. However, the industry is expected to recover in the medium term as macroeconomic conditions improve and companies focus on utilizing their existing capacity and improving overall utilization levels.