Volatile demand-supply dynamics dictating Indian IT industry

The Indian IT industry is in a state of flux. After recording double-digit revenue growth during FY22 and FY23, the sector is staring at a scenario where even achieving low single-digit growth will be nothing short of an achievement in FY24. The performance of the big three – TCS, Infosys and HCL Tech- indicate that all is not well in the technology outsourcing landscape. While TCS didn’t provide any revenue growth guidance for the ongoing financial year, it is likely to grow in low single-digit this fiscal. The country’s second IT services exporter, Infosys revised the upper end of its revenue guidance downward to 1-2.5 per cent for FY24 as compared to 1-3.5 per cent provided earlier.

Similarly, HCL Tech revised its revenue growth guidance downward for FY24 to 5-6 per cent from the earlier 6-8 per cent. Though mid-tier and some large firms are yet to announce their second quarter performance, these are not likely to be any different from the top three IT firms. Incidentally, the deal pipeline of all three firms raised recovery hopes in the next financial year. The total order book of TCS stood at $11.2 billion as many cost takeout deals were bagged by the Tata Group. Infosys had a blockbuster quarter with a record deal win worth $7.7 billion during this period, out of which 48 per cent was net new. Similarly, HCL Tech's total contract value of new deal wins was a record high at $3.97 billion, up 65 per cent YoY.

Such clinchers put these IT firms in good stead for growth in the next financial year. However, there is a catch to it. Many analysts are predicting an impending recession in the US economy next year. If that happens, these deal flows may not translate into revenue. But the current deal pipeline comes with a ray of hope. Meanwhile, IT firms seem to be stepping on cost optimisation measures in order to protect their operating margins. It is a known fact that around 55-60 per cent of the total operational cost of any IT company comprises wage cost. This means employees are the biggest leverages of IT companies. That is what is exactly happening in the industry right now. The top three have shed thousands of employees from their payrolls to protect margins.

Take for example, TCS’ total headcount fell by 6,333 to 608,985 employees by the end of September quarter. Infosys saw its headcount shrinking by 7,530 in Q2 at 328,764, which is its third consecutive quarter of decline. This trend reflects that companies are not backfilling vacant positions. Though many companies will not admit it, the fact is that some bit of involuntary attrition has started in the Indian IT industry.

The biggest protection to margin comes in two ways. The first of them is right-sizing employee pyramid. It means deploy higher number of freshers and engineers, who come for less salaries. Secondly, improve the employee utilisation levels. Both have started happening in the Indian IT industry. It is to be seen how these factors will play out in terms of headcount addition in the coming quarters.