IT Sector Revenues to be Flat in FY24
Market analysts are expecting revenues from the IT services to be flat over the next twelve months, over sluggish BFSI demand
A new report from Crisil projects a sharp drop of between 700 to 800 basis points in the revenue growth numbers of India’s IT services business over the next twelve months. And the blame for this sharp decline could be laid at the slowing BFSI demand from the United States and a general reduction in discretionary spending on technology.
The Crisil report said the decline in revenue growth would be on top of a robust 18 to 20% growth expected in the just concluded financial year, riding largely on the sharp 7-8% decline in the rupee value against the dollar. A year ago, the industry had shown a strong 19% growth as the Covid-19 pandemic resulted in more offshoring.
BFSI segment could see lower demand
Revenue growth from the BFSI segment could reduce to mid-single digits and this could become a crucial factor pulling down revenue growth for IT companies in FY24, says Anuj Sethi, senior director at Crisil, in the report. However, this slump could be marginally offset by a 12-14% growth in the manufacturing, and a 9-11% spike in other industry segments.
The BFSI segment had contributed nearly a third of India’s IT business revenues in FY22 which stood at around $1.2 trillion. In fact, most banks and institutions are predicting a decline in the rate of growth for the IT industry over the next 24 months, given that the North American market continues to struggle with high inflation and an upswing in Fed rates intended to cool it.
Discretionary spending goes on the backburner
A report from HDFC Securities said the revenue growth could also be in the low teens during FY23 while another by Motilal Oswal said the slowdown in discretionary spending in a few additional sectors such as hi-tech, manufacturing and retail could fuel a further decline in the revenue numbers for the last quarter of FY23.
Companies focusing on cost efficient work and enhanced vendor consolidation are ascribed as the prime reasons for this decline over the January to March quarter as most of North America and Europe are waiting with bated breath to see how the bank lending rates go over the next couple of months. If the Fed backs off from further rate hikes post the collapse of two major banks in the US, things could become easier, says an analyst with the company.
More contracts may not mean more cash
In fact, some analysts are of the view that while some deals could add muscle to the total contracted values of deals signed by Indian IT companies in FY24, they may not do much to offset overall revenue growth. They even point to Accenture’s latest numbers whereby it reported a 32% annual growth in contracts where realization was spread across many quarters.
One analyst pointed out that it would be an error to perceive cost optimization deals as a means to continue with a client. These are essentially a mix of vendor consolidation and offshoring but mostly function in the non-discretionary space. So, one may effectively pause projects that are capital intensive and go for others that offer better ROIs in the near term. And in doing so, these companies could be finding a means to conserve cash.
The revenue growth slowdown could also mean a challenge for operating margins on some of these companies, says an analyst adding that margins could improve under lower attrition and an easing of staff cost. However, they could come under pressure if the macro situation does not get better from the September quarter.
