New Delhi, Feb 6,2023: The growth momentum for the Indian IT services industry is likely to slow down in the near to medium term, rating agency ICRA said on Monday.

The growth momentum will witness slowdown owing to the evolving macroeconomic headwinds leading to lower discretionary IT spending.

“The order book position of leading IT services companies remains strong, which will support the growth over the near term. However, evolving macro-economic headwinds may result in lower order inflows going forward,” said Deepak Jotwani, assistant vice president and sector head, ICRA.

The rating agency expects a moderate revenue growth of 9-11 per cent in dollar terms in the near to medium term.

Moreover, the operating margins (OPM) for the sample set is expected to moderate by 150-200 bps in FY2023, due to wage cost inflation and some normalisation of operational overheads.

Nevertheless, it will remain healthy (at 20-22 per cent) with some improvement expected over the medium term, supported by stabilisation of wage costs, said the ICRA.

ICRA’s sample set of leading IT services companies reported a YoY revenue growth of 18.4 per cent in rupee terms and 9.9 per cent in dollar terms in the nine months of FY2023, against 17-18 per cent YoY growth in dollar terms in FY2022.

In terms of the segment-wise trend, growth in the BFSI segment, one of the key segments for IT companies, has tapered compared to the other segments in recent quarters, which is partially attributable to lower lending activity, according to the agency.

“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 the healthcare segments,” it added.

The industry is also grappling with high employee attrition in recent times, led by the demand-supply gap, especially for digital tech talent.

However, the attrition is on a declining trend from the last two quarters and ICRA expects attrition to further decline over the next two-three quarters before stabilising, supported by strong hiring in FY2022.

“We expect lower hiring by the IT service companies in the near term because of excess capacity added in FY2022 and expected moderation in demand compared to previous fiscals owing to the macroeconomic headwinds,” Jotwani said.