The sector’s revenue will witness a growth of 18-20 per cent this year, accentuated by a sharp depreciation of 7-8 per cent of the Indian rupee, the rating agency said. The sector’s revenue was around 19 per cent in the financial year 2022, the highest in eight years up till then.

However, CRISIL said, healthy growth in cost-optimisation deals, along with strong digital solutions, cloud, and automation capabilities, and a wide range of offerings will support the demand scenario.

The agency’s findings were based on a study of the top 17 firms, which accounted for around 71 per cent of the approximately Rs 10.2 lakh crore of the sector’s revenue last fiscal.

CRISIL Ratings’ Senior Director, Anuj Sethi said that the key reason for the sector’s revenue decline is a slowdown in the banking, financial services and insurance (BFSI) segment, which accounts for around 30 per cent of the IT services sector’s revenue.

“Headwinds in key markets, especially the BFSI segment in the US and Europe, will affect the revenue growth of domestic IT services companies. While BFSI segment revenue growth is expected to halve to mid-single digit, it would be marginally offset by 12-14% growth in the manufacturing segment and 9-11% growth in other segments. Net-net, there would be moderation in overall revenue growth. Notably, IT spends by clients are witnessing a shift towards cost optimisation and vendor consolidation away from discretionary spends by most end-user industries,” CRISIL’s Sethi said.

The report said that operating profitability will see a modest improvement of 50-60 bps to around 23 per cent in FY24, as IT firms are cutting back on new hiring and reining in employee costs.

Operating profitability is expected to moderate 150-175 bps in FY23 to a decadal low of 22-22.5 per cent due to higher employee costs, which form around 70 per cent of the total cost, CRISIL stated. It added that these costs will moderate in FY24 owing to more cautious hiring.

Meanwhile, attrition is expected to moderate to 23 per cent in fiscal 2024, but still, below the pre-pandemic average of around 24 per cent, the report stated.

“The full impact of the extraordinary hiring of fiscal 2022 was felt in fiscal 2023, because of which employee cost is estimated to rise by over 20%. Companies are now focussing on utilisation than advance hiring, supported by lower attrition. This should lead to marginal improvement in operating profitability in fiscal 2024. Larger companies with agile and large spectrum of capabilities will be able to cater better to the changing needs of clients and, hence, will be insulated from pricing pressure,” said Aditya Jhaver, Director, CRISIL Ratings.

With continued healthy cash generation, strong balance sheets, and sizeable cash surpluses, CRISIL Ratings said it expects the credit quality of IT service players to remain ‘stable’ in the road ahead.