Indian IT services industry likely to see mild revenue growth of 4-6% in FY25: ICRA

10 Sep 2024 Evaluate

Credit rating agency ICRA in its latest report has said that the Indian IT services industry is likely to see a second consecutive year of mild revenue growth of 4-6% in FY2025. Despite persisting challenges, ICRA projects the industry’s operating profit margin (OPM) to remain healthy at around 22% in FY2025, with attrition levels having declined considerably and expected to stabilise over the near term. Despite expectations of continued subdued growth, ICRA maintains 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 the industry players.

According to the report, revenue growth for the Indian IT services companies has remained tepid in the last five-six quarters as the industry continues to face challenges from macro-economic headwinds in key markets. Accordingly, ICRA’s sample set companies recorded a modest YoY growth of around 5.5% in revenues in USD terms in FY2024, against 9.2% in FY2023. In terms of geographic split of revenues, 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% of its Q1 FY2025 revenues from the US, 22-25% from Europe, and the balance from the RoW markets.

Thus, the report said 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. However, despite the moderation, growth in Europe has been more resilient compared to the US. Higher adoption of generative AI (Gen-AI) remains a key monitorable for the industry, over the medium to long term. Leading Indian IT services companies have trained a sizeable portion of their employee base in Gen-AI skills and have already started ramping up their capability and service offerings, to deliver AI-based solutions to their clients. While the order book or revenue contribution from Gen-AI deals so far is limited, it is likely to pick up over the medium term as overall technology adoption is more pervasive.

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