The information technology (IT) services sector is likely to see a second consecutive year of sluggish growth in fiscal 2025, with revenue seen rising 5-7%¹, as continuing global macroeconomic headwinds lead to modest increase in technology spends in the key markets of the US and Europe².

This follows a 12% compound annual growth over the decade through fiscal 2024 and ~6%³ on-year growth expected for fiscal 2024.

Operating margin, however, should sustain at 22-23% due to prudent management of employee costs (constitutes ~85% of total expenses and includes sub-contracting costs), through cautious hiring and with lower attrition reducing replacement cost.

A CRISIL Ratings study of the top 24 firms, accounting for ~55% of the ~Rs 14 lakh crore sectoral revenue last fiscal, indicates as much.

Four sectors account for ~65% of the revenue of the Indian IT services sector: banking, financial services, and insurance (BFSI; revenue share of ~30%), retail (~15%), technology (10%) and communications and media (10%). Technology spend in these sectors saw muted growth in low single digits in fiscal 2024, amid high interest rates⁴ and economic slowdown in key markets.

Manufacturing and healthcare segments (revenue share of ~10% each) were the only bright spots, with continued double-digit growth in tech spend, given the focus on process automation and research and development-based analytics, especially in healthcare.

Says Aditya Jhaver, Director, CRISIL Ratings, “The slowdown in technology spend will continue this fiscal, weighing on the revenue growth of IT service providers. Revenue from BFSI and retail segments will continue to be a drag with subdued growth of 4-5% while manufacturing and healthcare will grow at a healthy 9-10%. IT spends will remain focused on automation and optimising costs, while most end-user industries are likely to defer large discretionary spends.”

As revenue growth remained subdued, IT service companies pulled back on addition of fresh talent, resulting in headcount reductions⁵ by ~4% on-year in December 2023 (see Annexure). This, along with the decline in attrition to ~13% as of December 2023 from the high of 20% in fiscal 2023 provided a breather by limiting higher-cost replacement hiring during fiscal 2024.

Says Joanne Gonsalves, Associate Director, CRISIL Ratings, “We expect IT service providers to remain cautious on fresh hiring this fiscal, too, which will maintain employee utilisation at a healthy level of ~85%. With attrition remaining stable and only modest annual increments, operating margin will remain at 22-23%.”

Continued healthy cash generation, strong balance sheets and sizeable cash surplus will keep the credit quality of IT service providers stable. Players will continue to eye acquisitions, especially small and mid-sized opportunities that could enhance their product baskets and increase digital capabilities.

Given that IT service companies have continued to bag deals even amid subdued revenue growth, their medium-term prospects remain favourable. Also, focus on enhancing gen-AI based services in overall revenue share augurs well for future revenue growth.

That said, an appreciation in the rupee value or sustained delay in economic revival in key markets amid ongoing geopolitical conflicts could pose downside risks and will bear watching.

¹ Includes ~1% of currency depreciation impact compared with ~3.5% seen in fiscal 2024
² The US and Europe comprise ~85% of the sector’s revenue
³ Revenues grew by ~7% on-year in first nine months of fiscal 2024, for the 24 companies assessed
⁴ US Fed rates increased from 0.3% in Apr-22 to 4.5% in Mar-23 and thereafter to 5.3% in Mar-24, while ECB marginal lending rate has increased from 0.3% in Apr-22 to 3.8% in Mar-23 and thereafter to 4.8% in Mar-24
⁵ Top 12 players (including 6 Tier 1 companies & 6 mid-tier companies). Tier-1 companies record revenues above Rs 30,000 crore, rest are mid-tier