The information technology (IT) services sector would see a sharp fall in revenue growth to 12-13 per cent in FY23 from 19 per cent in FY22, ratings agency CRISIL said on Thursday. However, the current depreciation in the rupee, strong demand for new-age technologies, like artificial intelligence (AI), cloud computing and Internet of Things (IoT), would help the over $220-billion sector maintain double-digit growth, it said in a report. 

The moderation from 19 per cent to 12-13 per cent would be the highest in the last eight years, it said and attributed the decline to expected tightening of IT expenditure by companies amid inflationary headwinds in the US and the EU, which together contribute almost 85 per cent to the sector’ revenue. 

The agency also said that the revenue growth in FY22 was higher on a lower base of 6 per cent in the COVID-hit FY21. 

IT companies will start reporting their quarterly earnings from Friday, with biggest software exporter TCS scheduled to announce its results for the first quarter of FY23. 

There could be a marginal fall in profit margins to 22-23 per cent from 24 per cent due to rising employee costs and travel expenses, the report said and added that operating profitability would be “healthy”. 

Revenue contribution from the new-age digital business stream would cross the 50 per cent mark in FY23 from the 47 per cent level on higher spending on cloud infrastructure, which was expected to grow by 1.5 times in the next three years, and increasing adoption of new-age technologies, such as cyber security and IoT, CRISIL Director Aditya Jhaver said. 

Revenue growth from the banking, financial services and insurance segment, which constitutes nearly a third of the revenues for the sector, would remain healthy at 15-17 per cent in this financial year as against 18 per cent in the last financial year. This was despite the increasing interest rates, backed by rising digital transactions, predictive analytics, cloud and data security. 

Companies in the retail, manufacturing and telecom verticals were expected to tighten IT spending amid the highest inflation rates in the past two decades in the key US and EU markets. Revenue growth from these verticals would moderate to 11-13 per cent from 15-17 per cent as a result of inflation again, the report added. 

CRISIL Associate Director Tanvi Shah said that the net employee addition by tier-I players was at an all-time high of 2.7 lakh in FY22, and the attrition rate had touched 21 per cent from 10 per cent a year ago. 

Profit margins of the industry would supported by premium pricing as well as effective cost levers through maintaining a healthy off/on-shore employee mix and reducing sub-contracting amid rising visa approvals with rollback of protectionist policies in key service regions, the agency said.