December 5, 2023
In FY23, the industry grew by 9.2%
Despite challenges, major IT services companies have managed to address the impact on profit margins
Employee cost as a percentage of operating income for Indian IT services companies has risen steadily to 58% in H1 FY24
Icra anticipates a medium-term improvement as wage costs stabilise and employee utilisation rates increase
The revenue growth of the Indian IT sector is anticipated to rise above 6% in the fiscal year 2024-25, compared to the estimated 3-5% for the ongoing financial year, according to a report from the domestic rating agency ICRA.
The agency emphasised that this slower growth would influence hiring plans, with staff additions expected to remain “muted” over the next 2-3 quarters. Despite the industry’s robust 9.2% growth in FY23, a weak demand scenario, particularly in key markets like the US and Europe, has prompted a cautious approach towards hiring.
The agency attributed the subdued hiring outlook to macroeconomic challenges affecting major markets and explained that companies would optimise existing capacity to enhance overall utilisation levels. While recent increases in hiring inflated wage bills and impacted operating profit margins, Icra anticipates a medium-term improvement as wage costs stabilise and employee utilisation rates increase.
The report highlighted that attrition, which surged from the fourth quarter of FY21 to the second quarter of FY23 due to accelerated demand for digitisation during the COVID-19 pandemic, has declined since the third quarter of FY23. The growth slowdown in the US, accounting for 58-60% of the industry’s revenues, is attributed to macroeconomic headwinds and instability in the US banking sector, resulting in lower technological spending.
Similarly, Europe’s growth witnessed moderation but remained more resilient compared to the US, supported by healthy deal execution in the UK. The report indicated that the demand-supply gap for digital tech talent in the Indian IT services industry, driven by the COVID-19-induced digitisation push, has narrowed due to excess hiring in FY23 and a demand slowdown in the current fiscal year.
Despite challenges, major IT services companies have managed to address the impact on profit margins by enhancing operating efficiencies. The report revealed that the employee cost as a percentage of operating income for Indian IT services companies has risen steadily to 58% in H1 FY24, from 54% in FY21, primarily due to lower revenue growth.
Source: Economic Times