News & Analysis

Is the Global Chill Affecting Indian IT Companies? 

Indian IT companies had a good second quarter and it's only over the next two quarters that we would know if the global recession is impacting them or not

India’s big IT companies are a happy lot, at least for now. The second quarter results saw them beating market expectations while deals in the pipelines have every reason to make them perceive the future with hope in their hearts. However, when the earnings call went towards the third and fourth quarter expectations, opinions were all that unanimous. 

For starters, Wipro CEO Thierry Delaporte appeared quick to do an about-turn from their positions in July. He highlighted the shifts in the macroeconomic situation since July where the clients were less than optimistic about projects as inflation, geopolitical pressure, energy crisis and the continued spike in interest rates became a part of the conversation. 

The company’s guidance too was not as robust for Q3 with growth projected only in the range of 0.5% to 2% as against between 2% to 4% over the same period in 2021. To say that there was a sense of caution replacing last quarter’s optimism would be an obvious one. However, key competitor Infosys didn’t have any such qualms. 

The company pushed its bottom-end growth guidance up from 14% to 16% to between 15-16%, which could solely be attributed to the presence of a good pipeline. The same was the case with HCL Technologies which revised its forecast for FY23 up to between 13.5% to 14.5%, a full 150 basis points above what they’d told us earlier. Once again bookings and pipeline did their work. 

What these numbers appear to indicate is a rather short-term perspective of how things could go once the real effects of the slowdown is felt in North America and Europe. The Indian IT companies appear to still be holding their heads above the skies, which is where post-pandemic demand had placed them. Some of the real world issues seem to have dodged the big bosses. 


After the Fall, comes the Winter

Most years, the IT czars from this part of the world go on business trips to clients and new prospects in the US and Europe to catch them before their budgets for the next twelve months get ironed out. This exercise usually gets completed before Thanksgiving, which arrives on the final Thursday of November, post which work slows down till after the New Year. 

However, this time round most of these companies outsourcing to India are facing challenges internally that could slash these budgets. The high energy costs leading to  inflationary pressures, the repeated spikes in interest rates that leave less money in wallets and the job loss fuelled by budgetary constraints are all a reality for these big economies. 

The question therefore is would some of them still go ahead in the wake of falling profitability to offshore more or would it make sense for them to stay put at least till there is clarity on how the war in Ukraine is going to move and what impact it would have on the macroeconomic pressures that the countries face. 

With the Federal Reserve raising interest rates to tackle inflation, there is a slump in real estate sales and mortgages, which hurts the banking and financial sectors. That these form the core of Indian IT company revenues shouldn’t be forgotten at this juncture. The situation is worse in Europe where energy prices have burst through the ceiling, with factories being shut. 

In this scenario, it would be anyone’s guess whether companies would go for more outsourcing with open budgets or limit their spending till the situation pans itself out. The first response in such a situation is to seek vendor consolidation, which means one company could win a contract at the expense of another.

With margins already being at a low, it remains to be seen how IT companies offer savings to their clients by reducing prices further. While it is true that the pipelines appear robust, one must acquiesce with what TCS CEO Rajesh Gopinathan says about deals taking longer to traverse the journey through the pipeline as decision-making gets postponed.  


The IT hiring trend tells its own story

Most IT companies have slowed down hiring over the second quarter, which can be one of the key indicators of how they perceive things. Wipro added 600+ employees in the second quarter in spite of a 20% attrition. Against an average of 12,000 hires over each of the last four quarters, Wipro is obviously looking at enhancing utilization levels to shore up margins.  

Given that IT company employees move laterally between jobs, the hiring of freshers over the past few quarters is only making things better for the short term. While slowing demand is cutting down the pace of hiring, most IT companies have shelled out good money to retain their employees in recent times, thus taking a toll on the already narrow margins. 


A challenge with no immediate solution 

Given the challenge on their margins as it were and the slowing economy overseas, the IT companies would need to walk a tightrope for at least the next two to three quarters. Holding on to talent based on hopes of a renewed growth could work as a double-edge sword, given that even the customers at the other end would be looking to reduce their costs. 

In this scenario, hiring of freshers is likely to continue unabated as is evident from the numbers that big guns such as Infosys and TCS have indicated. The latter has already onboarded 35000 of their 40,000 target while infosys is said to be adding 50,000 people to its workforce over the next couple of quarters. 

With variable pay suddenly going out of fashion due to the cost arbitrages expected to reduce in both North America and Europe, the story from now till a point well into 2023 could be that of junior resources being trained and let loose on technologies like the cloud that could potentially be leverage better in case of a further slump in demand and the resultant consolidation. 

It sure does look like a long winter of discontent could well cast a shadow on India’s IT services business in the short term at least. 

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