Indian IT Industry Faces Muted Revenue Growth but Healthy Profits in FY2025: ICRA Report

The Indian IT services industry is expected to see muted revenue growth of 4-6% in FY2025, says ICRA. Despite this, operating profit margins are predicted to remain healthy at 22%, with improved attrition rates and strong deal pipelines. Challenges include macro-economic uncertainties in key markets.

The Indian IT services industry is likely to register a second consecutive year of muted revenue growth, estimated at 4-6 percent in FY2025, but the operating profit margin is expected to be healthy, according to ICRA.

The persisting challenges and tepid topline growth notwithstanding, ICRA has forecast the industry's operating profit margin (OPM) at a healthy about 22 percent in FY2025, with attrition levels having declined considerably and seen stabilising over the near term.

Despite expectations of continued subdued growth, ICRA has maintained its ''stable outlook'' on the Indian IT services industry, led by a well-established business position, expectation of healthy earnings and cash flow generation, and strong balance sheets of sector players.

''ICRA expects FY2025 to be the second consecutive year of muted revenue growth (for its sample set companies), estimated at 4-6 percent, given the lower discretionary technological spends by clients amidst persistent macro-economic uncertainty in the key markets of the US and Europe,'' Deepak Jotwani, Vice President and Sector Head – Corporate Ratings, ICRA, said.

Higher inflation and interest costs have put pressure on clients across key industries, with an increasing focus on cost optimisation and business-critical projects, and deferment of large discretionary spends. Though the revenue conversion of the orders has slowed down, the order book and deal pipeline of most IT services companies remain strong. This, coupled with the increasing prominence of technological spend by clients as part of their overall capital allocation strategy, is expected to support the growth momentum once the macroeconomic headwinds subside over the medium term, Jotwani said.

Revenue growth for the Indian IT services companies has remained tepid in the last five-six quarters as the sector continues to face challenges from macro-economic headwinds in key markets. Accordingly, ICRA's sample set companies (leading 15 large and medium-sized listed Indian IT services companies) recorded a modest on-year growth of about 5.5 percent in revenues in USD terms in FY2024, against 9.2 percent in FY2023.

Despite tepid revenue growth, ICRA expects the OPM for its sample set companies to remain healthy at about 22 percent in FY2025, aided by easing out of wage cost inflation and optimisation of operational efficiencies. The Indian IT services industry generates a lion's share from the US, followed by Europe and the Rest of the World (RoW) markets. ICRA's sample set companies generated 55-60 percent of its Q1 FY2025 revenues from the US, while Europe contributed 22-25 percent, and the remaining came from the RoW markets. So, the industry remains susceptible to macroeconomic uncertainties and any adverse regulatory changes in these markets, for example, the revenue growth from the US witnessed a sharp moderation in recent quarters as macroeconomic headwinds continue to intensify. Despite the moderation, however, growth in Europe has been more resilient compared to the US.

(With inputs from agencies.)