The IT sector predicts mid-to-high single digit revenue growth in the upcoming fiscal year, leading major companies to adopt a more cautious approach in their FY25 projections. This adjustment reflects expectations of delays in project executions and closures, as highlighted on Friday.
The revenue growth outlook for FY25 appears lackluster, with tier-1 IT firms projected to achieve below mid-single digit growth on average. Meanwhile, tier-2 companies are expected to limit their revenue growth to high-single digits.
Analysts from financial services organization Prabhudas Lilladher noted that while the current forecast is conservative, a potential macroeconomic recovery in the near future could prompt upward revisions as the year progresses.
FY24 concluded with another period of subdue performance within the IT services sector. Leading IT players in the country witnessed a collective reduction of nearly 70,000 employees in the last fiscal year. Among tier-1 companies, Tata Consultancy Services (TCS) showcased relatively better performance with a +1.1% revenue growth quarter-on-quarter (QoQ), while HCLTech reported a +0.3% QoQ revenue growth. Conversely, Infosys reported a decline of 2.2% QoQ in Q4, compared to a 1% decline in Q3.
Wipro, another major player in the IT sector, saw an 8% decrease in net profit to Rs 2,835 crore for the January-March quarter, down from Rs 3,074.5 crore in the same period last year. The company’s revenue also fell by 4.2% to Rs 22,208.3 crore in Q4.
The Crisil Ratings report indicates that the IT services sector in India is likely to experience a second consecutive year of muted revenue growth, estimated at 5-7% in FY25. Analysts at Kotak Securities note that recovery expectations have been deferred to FY26.
The implications of this conservative growth outlook extend to tax collection, with lower-than-anticipated revenues from IT giants like Infosys, TCS, HCL and Wipro potentially impacting overall tax receipts for the fiscal year.
The predicted slowdown in the tertiary IT service sector has raised concerns about its ripple effects across various segments of the economy, including Goods and Services Tax (GST) collections and the broader financial markets.
Domestic IT service providers may experience lower demand from businesses across various sectors. This can lead to a decrease in intra-state supplies and inter-state, affecting the collection of Central Goods and Services Tax (CGST), State Goods and Services Tax (SGST) as well as Integrated Goods and Services Tax (IGST) respectively.
The slowdown in the IT service sector can also have implications for shareholding patterns in companies operating within this domain. Investors, including institutional and retail shareholders, may reevaluate their positions in IT firms, considering the stunted growth outlook. This could result in fluctuations in stock prices and market capitalization, impacting overall investor sentiment.
Furthermore, mutual fund investments, which often include allocations to IT sector funds, may experience lower returns if the performance of IT companies remain subdued.
This can affect the attractiveness of mutual funds focused on the IT sector, potentially leading to shifts in investment preferences among retail and institutional investors. The slowdown in the IT service sector can also influence market activity and trading volumes in the stock market. Reduced growth prospects in the IT segment may dampen investor interest in related stocks, impacting trading volumes.
Lower trading volumes can affect brokerage charges levied by stock brokers, who contribute a significant portion of their revenue as GST on transaction fees/brokerage charges.
Moreover, a general slowdown in economic activity linked to the IT sector can contribute to broader market sentiments. Investor confidence, market liquidity, and overall participation may be influenced by perceptions of the IT sector’s performance and its implications for the economy as a whole.
Evaluating tax policies related to Information Technology services, such as tax slabs to encourage competitive growth while maintaining tax compliance and revenue neutrality is vital to maintaining the economic bounceback followed by the Covid-19 pandemic.
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