Challenging times ahead for Indian IT

Indian IT biggies reported decent set of numbers with a few exceptions. However, hiring trend, which is one of the lead indicators, is showing signs of fatigue. After a e year of record hiring in FY22, employee addition numbers are slowly inching down. The top four firms - Tata Consultancy Services, Infosys, HCL Tech & Wipro- added only 28,836 employees in the second quarter ending September, a massive 45 per cent drop from the 52,842 added in the previous quarter. Similar is the case of fresher hiring. The top four Indian IT biggies added 2,40,000 fresh engineering graduates in the last financial year. It is also witnessing a downward trend. Meanwhile, silent firing has started across the board with mid and senior level people becoming the first casualties. Even onboarding of fresh graduates is being deferred.

These are not encouraging news for the $227 billion-strong Indian IT industry. But it is on an expected line. When the world is fighting is high inflation and Russia-Ukraine induced economic uncertainty, IT spending is likely to come down in the near future. Global IT consultancy firm ISG, which tracks outsourcing contracts, recently said that spending on IT and business services slowed in the July-September period amid rising economic concerns. Interestingly, most IT companies reported robust deal pipeline despite slowdown talks. TCS closed outsourcing contracts worth $8.1 billion, a rise of seven per cent over last year. Infosys reported its best large deal wins in seven quarters as its total contract value from large deals stood at $2.7 billion compared to $1.7 billion in the previous quarter. Similarly, HCL Tech, which reported a stellar set of numbers in Q2, closed deals worth $2.38 billion. Such deal pipeline puts domestic IT firms in a good stead as far as revenue growth in FY23 is concerned. The concerns, however, remain for the next financial year when the slowdown impact will play out in full scale. Meanwhile, attrition numbers are coming down, albeit on a slow pace. Most IT firms continued to see more than 20 per cent employee attrition numbers in the second quarter of FY23. However, commentaries of officials indicate that attrition numbers have peaked and would inch down in the second half of the fiscal year.

While hiring, attrition, deal pipeline and revenue growth remain on a positive trajectory, operating margins of IT firms are the real sticky points. Despite improvement in margins, companies are likely to end up this fiscal year at the lower end of their guidance. Given the cost pressures coming from wage hikes, travel & utility expenses along with cross currency headwinds, IT companies are likely to pursue several cost optimisation measures in coming quarters. Letting go of staffers, holding back of bonuses, cut in marketing spend, increased automation & reduction in reliance on subcontractors are some of the levers that will be pressed to keep cost under control. Hike in contract prices is another feasible move to follow. However, if demand environment turns bad, getting a price increase will be difficult in coming quarters. All in all, second quarter earnings of Indian IT firms is a mixed bag with a cautious outlook.