According to Fitch Ratings, revenue growth in the Indian IT sector is anticipated to drop to 8-10% in the current and future fiscal years due to deteriorating economic circumstances in the two main markets, the US and Europe.
Domestic IT companies reported a 16.5 percent increase in sales in FY23.
“The Indian IT services sector’s annual revenue growth is likely to slow to 8-10% in FY24-FY25 (financial years ending March), on a constant currency basis, from the FY23 average of 16.5 percent, as global IT spending will shrink due to slower economic growth in the US and Europe,” the rating agency stated in a report.
In its Q1 FY24 results, Infosys Ltd reduced its revenue growth target for FY24 to 1-3.5 percent from 4-7 percent previously.
In its June global economic outlook, Fitch predicted that US real GDP growth would decelerate to 1.2% and 0.5% in 2023 and 2024, respectively, from 2.1 percent in 2022.
GDP growth in the Eurozone is expected to slow to 0.8% and 1.4% in 2023 and 2024, respectively, from 3.5% in 2022.
The agency expects a mild recession in the US in the fourth quarter of 2023 and the first quarter of 2024.
Revenue growth in the IT industry is driven by global economic growth and clients’ willingness to increase investments on technological infrastructure and digital initiatives. IT services are generally highly cash-generative businesses.
Fitch said the FY24 EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) margins of Indian IT services companies to be stable year-on-year and remain somewhat below historical averages, as easing cost pressures are offset by a weakening demand environment. It expects larger Indian IT services companies to continue to have high rating headroom due to their strong net cash positions and strong FCF (free cash flow) generation.
The agency said its rated major Indian IT services companies are likely to continue to generate pre-dividend FCF margins of 12-17 per cent on stable EBITDA profitability and low working-capital and capex requirements. “We expect Tata Consultancy Services Ltd (A/Stable), Wipro Ltd (A-/Stable), HCL Technologies Ltd (A-/Stable) to return 40-90 per cent of their pre-dividend FCF to shareholders via dividends and share buybacks