Revenue growth and margins of Indian IT services firms expected to moderate in short term: ICRA

Sample revenue growth expected to moderate to 12-14% in FY2023 due to base effect, macro conditions and inflationary headwinds in key markets.

ICRA maintains its stable outlook for India’s IT services industry, supported by a strong backlog and healthy demand prospects, particularly for digital services, while forecasting moderating revenue and margin growth operating profit (OPM) for its sample of 13 large listed companies. .

Commenting on near-term expectations for industry performance, Deepak Jotwani, Assistant Vice President and Sector Head, ICRA, said, “While the growth momentum of IT services companies (ICRA sample) s is broadly sustained in the first quarter of FY2023, partly supported by the depreciation of the INR against the USD growth, year-on-year, is expected to moderate to 12-14% over the course of the year. fiscal year 2023 due to base effect, macroeconomic conditions, and inflationary headwinds in key markets, impacting technology investments by customers. recent quarters and salary increases to retain existing talent will continue to drive salary cost inflation, leading to a likely moderation in OPM of 100 to 150 basis points over the course of the year. this 2023. Notwithstanding the same, OPM is expected to remain healthy at ~22%. Additionally, the surge in attrition levels seen lately is only expected to start abating by the end of FY2023. As a result, OPM will improve in the medium term through stabilization in labor costs with some employee pyramid optimization, better employee realization and utilization. »

IT services companies remain focused on improving the share of fixed price contracts, as this provides better revenue visibility and also enables greater deployment of offshore resources where wages are significantly lower, coupled with better utilization of manpower in these projects and the deployment of automation. Benefits are shared with the customer, leading to mutual benefit.

Since the industry generates a significant portion of its revenue in foreign currencies, the movement of INR against key market currencies has a critical bearing on the profits of the industry. The depreciation of the INR against the USD over the past few months likely bodes well for the industry in fiscal 2023. However, the overall impact of exchange rate fluctuations on the performance of the sector is also dependent on the development of INR against other key currencies, mainly the British Pound and the Euro, in the short term, as the INR has appreciated against both in the last quarter , which somewhat mitigates the gains on the depreciation of the INR against the USD. In addition, the overall impact will also depend on the extent of coverage by companies. Most companies in the CIFAR sample typically hedge a large portion of their currency exposure.

“ICRA maintains its stable outlook for India’s IT services industry, supported by a strong order book and healthy demand outlook, especially for digital services. Additionally, the credit profile of Indian IT services companies remains comfortable, supported by healthy internal accrual generation and strong balance sheets Despite steady outflows to rewarding shareholders and investments to fuel inorganic growth, the liquidity position of the CIFAR sample is expected to remain solid, helped by a healthy internal generation of accruals and the availability of excess liquidity and liquid investments, Jotwani added.

Indian IT services companies reported healthy revenue growth in FY2022 (17.6% YoY in INR terms for the ICRA sample) driven by accelerating demand for digital technologies (particularly for services such as cloud computing, cybersecurity, artificial intelligence, among others) and partly due to the weak base in fiscal year 2021, impacted by the Covid-19 pandemic. Growth was broad-based across all of BFSI’s key verticals, telecommunications, manufacturing, retail and distribution. Revenues for the defined sample in the key markets of the United States, Europe and the rest of the world (RoW) increased by approximately 17.7%, 21.0% and 14.5%, respectively, on on a yearly basis in fiscal year 2022. However, growth in Europe has slowed in the last two quarters, due to some moderation in incoming orders due to the ongoing geopolitical issues.

The aggregate operating profit margin (OPM) for the entire sample fell to 23.3% in fiscal year 2022 (from 24.2% in fiscal year 2021) due to a dramatic increase in labor costs, as the industry grappled with rising levels of attrition due to supply and demand gaps. To combat the same, IT service companies have offered salary increases and healthy incentives, greatly strengthened hiring activities, offered great flexibility in working arrangements and reskilled their employees, resulting in an increase costs. The industry reported a record level of hiring in fiscal year 2022, with the top five national IT services companies accounting for about 75% of that figure.