CRISIL expects FY23 IT revenue growth to taper 600 bps

The good news is that the IT services sector is likely to still log double digit revenue growth in the fiscal FY23. However, the not so encouraging news is that this growth in revenues is likely to moderate. The recession (or rather the expectations of a recession) are likely to keep pricing under pressure. While tech spending is unlikely to see a dent in any serious way, the impact is likely to be on pricing power of the IT service providers. That is likely to be lower in a year when IT companies would be desperate to expand their business.

According to a note put out by the rating agency, CRISIL, the information technology (IT) services sector will sustain double-digit revenue growth in fiscal 2023 i.e. FY23. However, the top line growth is likely to gravitate towards the range of 12-13% for the full year. That would be still about 600 to 700 bps lower than the average top line growth of around 19% witnessed in the last 8 years on an average. The top line growth is likely to be driven by digitalisation, strong demand for new-age technologies and depreciation of the rupee.

The top line constraints for the IT sector are likely to emanate from a generally expected tightening of IT spending by corporates amid strong inflationary headwinds in the United States (US) and European Union (EU). Now, these are two of the largest markets for IT services and for most of the Indian IT companies, the US and EU put together account for close to 85% of the top line revenues. Both these markets are likely to go into recession due to ultra-hawkish policies are at least likely to live under the fear of recession.

On the same vein, CRISIL has also noted that while the traditional practices like BFSI, telecom and manufacturing may face challenges, there are pockets of optimism too. For instance, top line of IT companies is likely to benefit from the greater global shift towards automation, digitization and digital transformation services. Growth had moderated in the last two years amidst the pandemic and the aftermath, so there is possibly going to be some revenge IT spending that is likely to be undertaken. Overall, these should mitigate the risk.

Like the top line growth is likely to take a hit, even the operating performance of these IT services companies are likely to see a dent according to CRISIL. According to the note put out by CRISIL, the operating profit margins could fall from 24% last year to the pre-pandemic lows of around 22-23%. The dent may not be too big but it is likely to be an outcome of higher operating costs, higher manpower costs, elevated travel costs as well as a steeper cost that these IT companies have to incur to handle record levels of attrition. 

According to CRISIL, there are several positives for the large sized IT companies. For example, the spending on cloud infrastructure is expected to grow 1.5 times (around 50%) in the next three years. In addition, the adoption of more bandwidth and processing intensive technologies like cybersecurity, artificial intelligence, machine learning and Internet of Things (IOT) are likely to be worthy contributors to the top line growth of the IT sector. CRISIL also expects that contribution of digital for the sector as a whole will be above 50% during the fiscal year FY23. 

The Indian IT services sector still derives around 75% of revenues BFSI (banking, financial services and insurance), retail, manufacturing and telecom verticals. While BFSI has been losing its traditional share, this is also the space that is seeing the rapid adoption of high end IT ideas like predictive analytics, cloud and data security. To cut a long story short, there will be some moderation in the top line growth for the IT services companies. However, the overall growth will still be robust, supported by new age technologies. That is good news.