Tough days ahead of Indian IT firms?

Third quarter results of Tata Consultancy Services (TCS) indicate interesting times ahead. The Tata Group company posted better than expected Q3 performance. The commentary on overall demand environment also doesn't indicate an impending cut in technology spending. According to the management of TCS, possible slowdown in the US seemed to be technical in nature and if that happens, it is likely to be a shallow one. Interestingly, UK- another important geography for TCS- is also holding out well. The only geography of concern highlighted by the company was Europe where the Russia-Ukraine war was acting as an overhang. Therefore, predicting the demand environment looks difficult. As far as deal bookings are concerned, it remained in the $7-$9 billion range. Despite marginal dip, deal bookings remained robust. Moreover, the management indicated that tech spending is yet to see any hit amid all the recessionary talks. However, emergence of cost takeout deals in the order-book reflects cautiousness among enterprises towards spending and their preference to save cost. The company said its deal pipeline remained well-balanced. Going by such commentary, one can expect that both large and small deals are coming in the way of Indian IT services providers.

Another important takeaway from TCS earnings is the respite coming from elevated attrition level. With laying off staffers by startups and global technology giants, labour market is cooling up. TCS saw its attrition dipping marginally on LTM (last twelve months) basis though quarterly attrition fell around six per cent. After struggling with high-level of employee churn for the last six quarters, Indian IT industry is witnessing some stabilization in the wage cost.

This augurs well as far as operating margin is concerned going ahead. For the first time in several quarters, TCS' headcount dropped. As employee addition is considered as a lead indicator of demand, spending on technology-related services is likely to be subdued despite positive commentary by TCS management. Moreover, after a huge intake of freshers from engineering college campuses, 2023 is likely to be a year of tepid job opportunities for engineers at campuses.

While TCS' Q3 performance can be inferred to gauge important parameters, with an annual revenue of close to $26 billion, the company sits at a different league all together. As a full-scale player, it has different leverages to grow its revenue and protect margin which may not be the case for mid-tier players. The management of TCS also said that the company is gaining market share. It means that some companies are losing contracts, while some are winning. Therefore, days of 'rising tide lifts all boats' is over. From here on, there is a high chance of divergence in growth stories of companies. While some will emerge as winners, others may have to navigate a relatively tough demand environment. After TCS, other major firms - Infosys and Wipro will announce their results this week. These will provide much clarity on the overall demand outlook and what FY24 holds for the global IT services industry. Especially, performance of mid-tier firms will be keenly watched.