IT majors gain as pandemic fuels digital services boom

IT behemoths Tata Consultancy Services, Infosys Ltd and Wipro Ltd reported a rise in sequential revenue in the third quarter, boosted by higher client spending on digital transformation during the Covid-19 pandemic. The strong growth in the quarter prompted Infosys to raise its annual revenue forecast.

Companies across sectors shifted to hybrid working models and spent more money on services including cloud computing, cybersecurity, digital payments and crypto platforms during the pandemic, boosting the deal wins and fortunes of software services exporters.

The trend has made the $194 billion IT services sector one of the rare winners of the pandemic. Infosys said it now expects revenue in the current financial year to rise 19.5% to 20% in constant currency terms, versus its prior guidance in October 2021 calling for a 16.5%-17.5% rise.

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“Overall deal pipeline is larger than we’ve ever had. This is in line with the digital transformation our clients want,” Infosys Chief Executive Salil Parekh said on Wednesday.

Analysts cheered the deal wins but worried about the high attrition rate.

“Overall, strong revenue growth in the quarter along with robust deal booking, but the sharp spike in attrition is a matter of concern,” said Piyush Pandey, Lead Analyst – Institutional Equities, Yes Securities, which has a “Buy” rating on Infosys.

Infosys posted a net profit of Rs 5,809 crore in the quarter, growing 11.8% year over year and 7.1% quarter over quarter. Smaller rival Wipro reported a near flat profit in the quarter and declared an interim dividend.

Meanwhile, industry leader TCS, seen as Tata Sons’ prime cash cow, reported a rise in quarterly profit and approved a share buyback worth Rs 18,000 crore.

Last month, European rival Accenture Plc had forecast better-than-expected quarterly revenue on the back of a strong rebound in client spending.

At the time, analysts highlighted how the pandemic had created a multi-year IT spending cycle.

An attrition problem?

All the three companies seem to be grappling with a huge attrition rate as demand for tech talent continues to soar in the pandemic, making it easier for techies to switch companies.

TCS had the lowest attrition of the three IT majors which reported results on Wednesday. Its attrition climbed to 15.30% in the quarter, higher than 11.90% in the previous quarter.

We “have to invest in hiring and talent for our own good,” TCS CEO Rajesh Gopinath acknowledged.

Wipro had an attrition of 22.70% versus 20.50% in the previous quarter. Infosys posted an attrition rate of 25.50% in the third quarter, versus 20.10% in the previous quarter.

“Attrition will inch down from various players in the industry. As freshers are recruited more, these numbers will stabilise,” said Infosys Chief Financial Officer Nilanjan Roy.

Analysts had expected attrition – which has been one of the major concerns of the IT industry since the beginning of the pandemic – to continue.

Vijay Sivaram, CEO of Quess IT Staffing expected attrition to be high in the next 12-18 months. “While attrition will continue during the pandemic, we have witnessed campus placements that would get a boost because of the ability of companies to hire through remote means,” Sivaram said.

Considering the strong pipeline of projects that the top IT companies have lined up, they will need ready-to-deploy talent, Jang Bahadur Singh, Senior Consultant, Performance & Rewards at Aon, said.

“Majority of the large IT players in the market such as TCS, Infosys, Wipro have very strong demand pipelines and need ready resources that can be deployed immediately to client-billable projects. Hence, currently a lot of the hiring is happening in the experienced to senior professional range,” Singh said. This would mean a typical experience band of 3-7 years.

“Organisations have started to build for the future and returned to campus to build bench strength, so even campus hiring is back to pre-pandemic levels,” said Singh, who expected more hiring from Tier 2 & 3 cities in the next two to three years.