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ICRA says the growth momentum for the IT sector companies is likely to remain muted over the near term, owing to the looming uncertainty related to imposition of the US trade tariffs and macro headwinds across key markets of the US and Europe.
Attrition levels in the IT sector is expected to stabilise around the long-term average of 12-13 per cent over the near term, says ratings agency ICRA.
TCS, Infosys, HCLTech, Wipro: Even as the IT shares are under stress amid profit-booking and fears of recessions in the US, ratings agency ICRA said the tech industry is likely to remain muted over the near term, owing to the looming uncertainty related to the imposition of the US trade tariffs and macroeconomic headwinds across the key markets of the US and Europe. It added that the IT industry is expected to witness a moderate 4-6 per cent revenue expansion in dollar terms in FY2026.
ICRA anticipates attrition levels to stabilise around the long-term average of 12-13 per cent over the near term. Moreover, hiring is likely to remain low until the growth momentum picks up by the end of FY2026. The operating profit margins (OPM) for the sample set is expected to sustain at 22.5-23.0 per cent over next three to four quarters.
The ratings agency projects its sample set of 15 large and small Indian IT services companies (which account for nearly 60 per cent of the industry in revenue terms) to witness a moderate 4-6 per cent revenue expansion in USD terms in FY2026.
Large and medium Indian IT companies include TCS, Infosys, Wipro, HCLTech, Coforge, and Persistent, among others.
Deepak Jotwani, vice-president and sector head, ICRA, said, “The growth momentum for ICRA’s sample set of IT services companies is likely to remain muted over the near term, owing to the looming uncertainty related to imposition of the US trade tariffs and macroeconomic headwinds across the key markets of the US and Europe.”
Key Monitorables
ICRA projects a moderate 4-6% revenue expansion in USD terms in FY2026, following the 4-5% increase estimated for FY2025. Policy changes by the US government for key sectors catered to by Indian IT services companies as well as future interest rate trajectory will remain the key monitorables, he added.
IT Sector’s Revenue Growth In 9M FY25
The ICRA sample set recorded a YoY revenue growth of 3.6% in USD terms in 9M FY2025, witnessing gradual recovery over the past three quarters, supported by a relatively lower base of FY2024, slight uptick in discretionary spend by customers in the banking, financial services & insurance (BFSI) and retail sectors in some markets and investments in Generative AI (GenAI) initiatives translating into new order inflows.
‘Easing Of Attrition Rates’
There has been some respite for industry players with easing of attrition rates and wage cost inflation, which had surfaced as areas of concern over FY2023 and H1 FY2024, ICRA said.
The last 12 months’ (LTM) attrition for the IT companies corrected sharply to 12.8 per cent in Q3 FY2025 from 22.3 per cent in Q3 FY2023 as the overall slowdown in growth momentum and strong hiring in the previous fiscal addressed the demand-supply mismatch witnessed earlier.
ICRA expects attrition levels to stabilise at a long-term average of 12-13 per cent over the near term. Moreover, employee cost as a percentage of operating income (OI) declined marginally to 56.2 per cent in Q3 FY2025 from 57 per cent in Q3 FY2024 owing to moderation in wage hikes in the current fiscal. This, coupled with increased employee utilisation and optimisation of cost structure supported the OPM for the sample set at 22.5-23 per cent in recent quarters, which are expected to sustain over FY2026.
Hiring To Remain Low
ICRA expects hiring to remain low in the near term until the growth momentum picks up by the end of FY2026. Lower hiring activity can also be correlated with higher investments by the industry on GenAI and the expected benefits in terms of increased productivity and cost savings. Leading Indian IT services companies have trained a sizable portion of their employee base in GenAI skills and have already started ramping up their capabilities and service offerings, to deliver GenAI-based solutions to their clients.
GenAI-Related Deals
“This has started to show results as the inflow of GenAI-related deals for major industry players have risen in recent quarters and is expected to pick up materially over the medium term, as overall technology adoption is more pervasive. The healthcare and BFSI sectors remain the early adopters of AI/GenAI capabilities and continue to invest in the same,” Jotwani added.
While near-term revenue pressures exist and deal cycles have elongated further, overall deal wins for the industry in recent quarters have remained resilient. Industry participants continue to sit on healthy total contract value, which provides revenue visibility over the near to medium term.
Meanwhile, Morgan Stanley also sounded cautious on the earnings outlook for the Indian IT sector. “We lower our revenue growth forecasts for the sector as a whole for FY27. Our earnings per share (EPS) estimates don’t change much as we factor in rupee depreciation versus the US dollar. However, we lower our target multiples for stocks as we see risk of stocks reverting closer to their long-term average multiples in the absence of any material positive catalyst,” wrote Gaurav Rateria, Sulabh Govila and Sakshi Rana of Morgan Stanley in a note.
On Wednesday, March 12, the Nifty IT index entered bear market territory, having corrected more than 20 per cent from its all-time high in December last year. All stocks within the Nifty IT index are currently in the red, with names like LTIMindtree and Mphasis seeing corrections of over 30% since December 13, 2024.
