BFSI to drag FY24 growth for Indian IT services companies, says Motilal Oswal report

Technology-related spends are likely to remain muted over the near term led by challenging macro environment and concerns on stability of the overall banking industry though the long-term demand will remain intact, according to a Motilal Oswal technology sector report.

“With an already high base (strong spends in FY22 and FY23), this would result in a muted industry topline growth for FY24. However, we expect the peak of weak macro impact to play out by 1H FY24 before recovering gradually in 2H FY24. With structural demand remaining intact, we continue to expect a strong demand recovery in FY25,” Motilal Oswal said in its report.

The adverse impact of IT-related spending cuts should primarily be on discretionary spends, which have been the key spending area post Covid-induced disruptions. On the other hand, cost optimisation and vendor consolidation-related spends should remain the prime focus over the next 3-4 quarters.

“Though IT spends have remained resilient, rising interest rates and current trouble in the US banking system imply adverse near-term impact for IT spends. We expect the banks to maintain caution and curtail discretionary technology spending until the situation stabilizes. This would hit IT spends in the early part of FY24 and exert further pressure on near-term growth outlook for IT services,” the report said.

The brokerage firm said it remains watchful of the situation and any further weakness in banking ecosystem would be viewed negatively.

With industry hiring ahead of the curve in anticipation of strong demand and high attrition, most of the companies took hit on profitability during the current year. “However, moderation in hiring, lower backfilling costs due to easing attrition rates, lower sub-contractor expenses and normalization in salary cost for employees should support margin expansion in the medium term. Our estimates indicate that the recovery in growth from 2H FY23 and 100 basis point margin improvement over FY23-25 should drive the industry’s earnings growth,” the report said.

Though the current macro environment remains weak, the structural demand outlook for the sector remains intact. “We continue to believe that the macro challenges will ebb by 1H FY24 and the situation will start improving in the later part of the year. This should be followed by healthy recovery in FY25 with improved visibility for clients and catch up in tech spends. Normalisation in hiring, higher fresher additions, lower attrition, improvement in utilisation and lesser reliance on sub-contractor expenses should drive margin expansion over the medium term,” Motilal Oswal said.