Another Washout Year For IT?

During calendar year 2023 quarterly results discussions, blockbuster dealmaking took centre stage for India's top IT players. Despite the spotlight, the financial payoff has yet to materialise amid a slump in discretionary spending throughout the year.

The $250-billion Indian IT services sector is unmistakably bracing for a near-term slowdown, influenced by restrained tech investments in the US and European markets grappling with high interest rates and inflation. This is reflected in consistent revenue guidance cuts across major IT players as they deal with tough market conditions. Complicating matters, global disruptions like Russia's prolonged war in Ukraine and the Israel-Hamas conflict add another layer of complexity to an already challenging landscape.

In a note in October, JP Morgan analysts said that investors had assumed FY24 to be a washout and shifted focus to FY25, hoping for a rebound. With two quarters to still to go for the completion of FY24, the situation looks pretty grim for the sector.

Guidance Takes A Hit

Infosys revised its FY24 revenue growth guidance from 1 per cent-3.5 per cent in Q1 FY24 to a narrower range of 1 per cent-2.5 per cent in Q2 FY24, citing challenges such as reduced discretionary spending and delayed decision-making in an uncertain macro-environment. On similar lines, HCLTech, which had initially projected 6-8 per cent constant currency revenue growth for FY24, adjusted its guidance to 5-6 per cent in Q2. Despite this, the company maintained its 18-19 per cent operating margin target.

Meanwhile, Wipro, anticipating a challenging macro environment, provided a negative revenue growth guidance of -3 per cent to -1 per cent for Q2 FY24. The company expected to sustain its 16 per cent margin amid uncertainties, attributing a -0.6 per cent decline in constant currency terms to market uncertainties and a slowdown in discretionary spending. These adjustments highlight the industry's sensitivity to evolving economic conditions and the companies' strategies to navigate a changing landscape.

“Even as enterprises continue focusing on cost optimisation, improving efficiency, automation, etc., deal bookings by IT service providers are expected to remain strong in the upcoming quarters. However, the large deals signed so far are expected to ramp up mostly in the latter part of FY 2024-25. The impact of the upcoming deals on service provider revenues for FY25 is still uncertain, given the volatile environment,” affirms Harish Krishnakumar, Senior Market Analyst, Enterprise IT Services & Cloud, India, IDC.

Credit ratings agency Icra expects the revenue growth of the Indian IT services industry to moderate to 3-5 per cent in FY2024 (in USD terms) versus ~10 per cent in FY2023. It says the slowdown is expected to persist for another couple of quarters, which translates to H1 of 2024 or Q3 FY24 and Q4 FY24.

The ‘Hiring’ Pulse

India churns out around 15 lakh engineering graduates annually, with the IT sector traditionally onboarding approximately two lakh of these freshers through campus placements. And gauging the influx of talent quarter-on-quarter from the extensive pool of engineering graduates serves as a key indicator in understanding the industry's well-being and its anticipated growth direction.

“The foundation of technical education in India heavily relies on IT hiring, and campus hiring serves as a crucial avenue for industry growth. However, due to a subdued year, headcount growth has stagnated, resulting in a decline in the attrition rate. Campus hiring currently experiences a 15 per cent reduction, with an anticipated overall dip of 25 per cent in 2024, following a significant decrease in 2023,” says Anshuman Das, CEO at Careernet.

On the other hand, Sunil Chemmankotil, CEO at staffing solutions company TeamLease Digital shares that the current scenario indicates a drastic departure from the norm, with signs of a 50-60 per cent reduction in overall fresher hiring for the year 2024. “This year, a couple of IT service majors decided not to do campus hiring and that means there is a huge drop. Meanwhile, others have said ‘yes’ to hiring, but still they have not started the process by now. They would have been in campus and hiring in big time (by now). But overall, the mood I observe is that the campus hiring for this campus season looks to be very poor,” Chemmankotil affirms.

IT major Infosys in Q2 FY24 post-results press conference announced that it will most likely not visit campuses in the current fiscal year as the company continues to have a significant fresher bench. The company’s CEO and MD Salil Parekh had stated that the company harbored inefficiencies within its employee pyramid with potential for optimisation, expressing confidence in the ability to enhance utilisation levels to the range of 84-85 per cent. But the CEO had also said that the company would monitor the situation on quarterly basis.

Meanwhile, Tata Consultancy Services (TCS) has maintained that it would look to onboard 40,000 freshers in current fiscal but did not rule out lateral hiring. The company during Q2 results said that it would keep an eye on the demand outlook on for discretionary spending.

Wipro, India's fourth-largest software services firm, is also adjusting its hiring strategy due to a challenging business environment. Instead of a large-scale recruitment drive, the company said it planned to prioritise fulfilling existing job offers before bringing in new hires. This shift comes amid decelerating sales in the fiscal second quarter and lower-than-expected net income. Saurabh Govil, Wipro’s Chief Human Resources Officer, during Q2 FY24 results press conference had emphasised caution in response to industry-wide changes and mentioned a reduction in overall new recruit intake for the fiscal year, despite hiring 22,000 new graduates in the previous fiscal year.

Year Ahead

The current situation is witnessing stable IT domestic consumption and there is no anticipated drop in it. However, concerns arise regarding export consumption, which constitutes 70 per cent of the Indian IT industry. The recent US Federal Reserve announcement to maintain interest rates is being viewed positively. While US labour markets are performing well, a hold on discretionary spending, comprising 20 per cent of total IT spend, is affecting the industry.

But several Indian brokerages, including ICICI Securities, anticipate rate cuts. Currently, the US is guiding three interest rate cuts in 2024 while market is envisaging up to five cuts next year. This could mean good things to come for enterprises and their technology spend, which would directly impact Indian IT companies positively in the second half of 2024.

Some analysts are also anticipating IT services budgets to increase 2-4 per cent in 2024 compared to 2022 budgets. According to HFS Research’s recent Pulse study involving 600 major enterprises, there will be a notable resurgence in technology spending, with a projected 9 per cent growth in CY24 but this may not be universal across IT firms.

Besides, the uncertainty stemming from global events, including geopolitical tensions and potential Covid flare up, may prolong the recovery further. Sunil Chemmankotil, CEO at TeamLease Digital, suggests a cautious approach for the next two quarters, expects a status quo in IT industry activities.

“Even as enterprises continue focusing on cost optimisation, improving efficiency, automation, etc., deal bookings by IT service providers are expected to remain strong in the upcoming quarters. However, the large deals signed so far are expected to ramp up mostly in the latter part of FY 2024-25. The impact of the upcoming deals on service provider revenues for FY25 is still uncertain, given the volatile environment,” - Harish Krishnakumar, Senior Market Analyst, Enterprise IT Services & Cloud, India, IDC.