IT companies, including TCS, Infosys and Wipro, remain susceptible to macroeconomic uncertainties and adverse regulatory changes in the US and European markets as the Indian IT services industry generates 60-65 per cent of its revenues from the US market and 20-25 per cent from the European market, according to a report by ratings agency ICRA.
The IT industry is currently grappling with a surge in employee attrition, led by demand-supply gap, especially for digital tech talent. Moreover, training and incubation costs for fresh hires recruited over the recent quarters and higher remuneration to retain existing talent led to 200-250 bps YoY moderation in the operating profit margin for ICRA’s sample set in H1 FY2023.
ICRA’s sample set of leading IT services companies reported a steady YoY growth of 20.1 per cent in revenues in H1 FY2023 in rupee terms.
“ICRA, in its recent research report, has cited the fact that given that the Indian IT services industry generates about 60-65 per cent of its revenues from the US market and 20-25 per cent from the European market, it remains susceptible to macroeconomic uncertainties and adverse regulatory changes in these key operating markets,” the rating agency said in the report.
While wage cost inflation is likely to start tapering from the end of the current fiscal, margins will remain susceptible to any moderation in business performance due to the macroeconomic headwinds.
Deepak Jotwani, assistant vice-president and sector head at ICRA, said: “Growth in the BFSI (banking, financial services and insurance) segment, one of the key segments for IT companies, has tapered more than other segments in recent quarters, and this is partially attributable to lower lending activity. Moreover, if the macroeconomic headwinds persist, the mortgage lending and the retail segments are expected to witness relatively higher moderation in growth, compared to the manufacturing and healthcare segments.”
He added that while the current healthy order book position from clients will support healthy growth over the near term, the evolving macroeconomic situation is likely to result in lower order inflows going forward.
“Management commentary across companies suggests that decision-making on incremental IT spending has slowed down, with the focus shifting towards prioritising critical projects,” Jotwani said.
He also said ICRA, however, maintains its stable outlook on the sector as it expects minimal impact on the credit profile of most of the industry players as their balance sheets remain strong. That said, a stretch in the receivables cycle (especially for smaller entities and captive units) and impact of debt-funded inorganic investments remain the key monitorables for select issuers.
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