FY25 will witness another year of modest revenue growth for IT service providers, according to CRISIL

FY25 will witness another year of modest revenue growth for IT service providers, according to CRISIL

The experts predict that the corporations would issue small yearly raises and take a cautious approach to recruiting.

About 65% of the Indian IT services industry's income comes from four industries, and in FY24, these sectors' technology spending increased at a moderate rate.

The global macroeconomic challenges that are hitting the US and Europe, the IT service businesses' primary markets, will result in another year of limited revenue growth, predicts Crisil.

According to the experts, the firms' FY25 sales growth would be between 5% and 7% YoY, which will be a second year in a row of modest revenue growth. This comes after a decade-long compound annual growth rate of 12 percent through fiscal 2024, and an anticipated YoY increase of around 6 percent for FY24.

There will only be a little rise in technology spending in the US and European markets, which explains the lackluster revenue performance of FY25.

According to Crisil's analysis, in order to preserve their profit margins, the corporations will become more selective when it comes to recruiting and would only provide small yearly raises in FY25.

The operating margin of the service companies, according to the analysts, will remain at a healthy 22–23 percent due to "prudent management of costs for employees (constitutes ~85 percent of total expenses and includes sub-contracting costs), through watchful hiring and with lower attrition reducing replacement cost."

"The slowdown in technology spend will keep going this fiscal, affecting on the revenue growth of IT service providers," said Aditya Jhaver, Director of CRISIL Ratings.

"Retail and BFSI revenue will remain a drag, growing at a muted rate of 4-5 percent, while manufacturing and healthcare revenue will grow at a robust 9–10 percent," he said. While most end-user businesses are expected to postpone significant discretionary expenditures, IT spending will continue to be focused on automation and cost optimization.

About 65 percent of the Indian IT services industry's income comes from four sectors: retail (about 15 percent), technology (10 percent), the media and communication (10 percent), and banking, financial services, and insurance (BFSI; revenue share of about 30 percent). "Technology spend in these sectors saw muted expansion in low single digits in fiscal 2024, amid increased interest rates and economic slowdown in key markets," the experts said.

They pointed out that, considering the emphasis on process automation and research and development-based analytics, particularly in the healthcare sector, the manufacturing and healthcare categories (with revenue shares of around 10% each) were the only areas of growth in FY24, with continuous double-digit increase in tech investment.