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The IT services sector in India is likely to see a second-successive year of muted revenue growth, at 5-7 per cent in FY25, amid continuing global macroeconomic headwinds, a report showed on Wednesday.

This follows a 12 per cent compound annual growth over the decade through fiscal 2024 and 6 per cent (year-on-year) growth expected for fiscal 2024, according to a Crisil Ratings report.

As revenue growth remained subdued, IT service companies pulled back on addition of fresh talent, resulting in headcount reductions by 4 per cent (on-year) in December 2023.

This, along with the decline in attrition to 13 per cent as of December 2023 from the high of 20 per cent in fiscal 2023, provided a breather by limiting higher-cost replacement hiring during fiscal 2024.

“The slowdown in technology spend will continue this fiscal year, weighing on the revenue growth of IT service providers. Revenue from BFSI and retail segments will continue to be a drag with subdued growth of 4-5 per cent while manufacturing and healthcare will grow at a healthy 9-10 per cent,” said Aditya Jhaver, Director, CRISIL Ratings.

The report looked at top 24 firms, accounting for 55 per cent of the Rs 14 lakh crore sectoral revenue last fiscal.

“IT spends will remain focused on automation and optimising costs, while most end-user industries are likely to defer large discretionary spends,” Jhaver added.

Four sectors account for 65 per cent of the revenue of the Indian IT services sector: Banking, financial services, and insurance (BFSI, revenue share of 30 per cent), retail (15 per cent), technology (10 per cent) and communications and media (10 per cent).

“Operating margin, however, should sustain at 22-23 per cent due to prudent management of employee costs (constitutes 85 per cent of total expenses and includes sub-contracting costs), through cautious hiring and with lower attrition reducing replacement cost,” the report showed.