Although the revenue contribution from Generative (Gen) AI deals for IT services companies is currently limited, the rating agency Icra believes it will increase over the medium term as technology adoption becomes more widespread.
"Higher adoption of Gen-AI remains a key monitorable for the industry, over the medium to long term. Leading Indian IT services companies have trained a sizable portion of their employee base in Gen-AI skills and have already started ramping up their capability and service offerings, to deliver AI-based solutions to their clients," it said.
India's top IT services company Tata Consultancy Services' AI and Gen AI pipeline have doubled in the first quarter to $1.5 billion.
During the first quarter earning conference, TCS CEO and MD K Krithivasan, said, "We also look for opportunities to bring in productivity or other value efficiencies through Generative AI. Clients do want us to look at Generative AI as one of the levers to better deliver in terms of cycle time or in terms of cost or quality."
During 2023–24, TCS trained 350,000 employees, and Wipro trained 220,000 employees on AI.
The rating agency expects the Indian IT services industry to see a second consecutive year of mild revenue growth, estimated at 4-6% in FY2025. Icra projects the industry’s operating profit margin (OPM) to remain healthy at 22% in FY2025, with attrition levels having declined considerably and expected to stabilise over the near term.
Deepak Jotwani, Vice President & Sector Head – Corporate Ratings, Icra, said, “Icra expects FY2025 to be the second consecutive year of muted revenue growth, estimated at 4-6%, given the lower discretionary technological spends by clients amidst persistent macro-economic uncertainty in the key markets of the US and Europe.
Higher inflation and interest costs have exerted pressure on clients across key industries, with an increasing focus on cost optimisation/ business critical projects, and deferment of large discretionary spends."
Though the revenue conversion of the orders has slowed down, the order book and deal pipeline of most IT services companies remains strong.
He added that this, coupled with the increasing prominence of technological spend by clients as part of their overall capital allocation strategy, is expected to support the growth momentum once the macroeconomic headwinds subside over the medium term.
Revenue growth for the Indian IT services companies has remained tepid in the last five-six quarters as the industry continues to face challenges from macro-economic headwinds in key markets.
In terms of geographic split of revenues, the Indian IT services industry generates a lion’s share from the US, followed by Europe and the Rest of the World (RoW) markets.
Moderation in demand, coupled with the increase in utilisation of excess manpower capacity added in FY2023 has exerted pressure on hiring by IT services companies in recent times.
While the level of negative net addition declined considerably in Q1 FY2025, Icra expects hiring to remain muted in the near term until the growth momentum picks up materially. Earlier, hiring by IT services companies was at an all-time high in FY2022 and H1 FY2023, buoyed by strong demand for digital technologies and to combat the surge in attrition levels.
Moreover, there has been a steady decline in the last twelve-month (LTM) attrition over the last five quarters. “The LTM attrition for Icra’s sample set companies tapered significantly to 13.1% in Q1 FY2025 from 23.2% in Q2 FY2023 as the overall slowdown in growth momentum and strong hiring in the previous fiscal corrected the demand-supply mismatch witnessed earlier. Icra expects attrition levels to stabilise at a long-term average of 12-13% in FY2025,” Jotwani added.