Q4 results: The end of the euphoric pandemic years for IT industry

The fourth quarter performance of tInformation Technology industry’s top quartet has only rung home the fact that two-year surge the sector witnessed during the pandemic is over. Their sales projections for the current financial year are more reminiscent of the single-digit revenue growth registered in the pre-pandemic years. The excesses of the pandemic years in terms of hiring, subcontractor expenses and staffing costs have now come to haunt the industry. The cost takeout deals, falling attrition and cooling labour market offer a silver lining, but they are clearly not enough to sustain the pandemic years’ revenue growth.

“Overall, we see the industry slowing but not contracting. The larger cost-saving deals will go some way to offset the decline in discretionary spending but will not be able to completely counter-balance it. We see a future of slower growth and increased pricing pressure, with more legacy (business) moving offshore, and an increase in nearshoring. A few less profitable and slower growth quarters are on the anvil, which will accelerate the shift into the new mature digital market,” Peter Bendor- Samuel, chief executive of global consultancy firm, Everest Group told the DH.

Also Read | L&T Finance Q4 net up 46 per cent to Rs 501 cr on higher loan sales, margin

With digital spends on hold and uncertainty around the BFSI (banking, financial services & insurance) vertical, rating agencies like CRISIL have projected the Indian IT services industry to grow around 10-12 per cent in FY24, a fall of 7-9 per cent from the previous fiscal. The revenue growth guidance of large IT firms is far more conservative. For instance, after a surprise fall in sequential revenue growth in Q4, Infosys has guided a 4-7 per cent revenue growth for FY24, in constant currency terms. Noida-headquartered HCL Tech has projected to grow its revenue in the range of 6-8 per cent. Though TCS & Wipro don’t provide annual revenue guidance, management commentary doesn’t inspire expectations of a double-digit growth rate in FY24.

Contending with the flab

On the other hand, several top and mid-tier IT firms are stuck with high bench strength (number of reserved employees). With demand slowing down employee utilisation has dipped, depressing both operating margin and revenue per employee. Inevitably, the current financial year will be one of tepid hiring and tell on increments. Glimpses of this trend are already visible. During the fourth quarter, companies such as Infosys and Wipro reported negative headcount growth, while it was subdued for TCS.

“Hiring has come down significantly. It is down by around 40 per cent as compared to the same period last year. Because the bench has increased, IT firms have to utilise those resources,” Aditya Narayan Mishra, the CEO of CIEL HR Services told DH.

Meanwhile, employee attrition level has already started to fall substantially during the fourth quarter - a sign of a cooling labour market. TCS reported 120 basis decline in its attrition sequentially at 20.1 per cent in Q4 of FY23, while Infosys witnessed 340 basis points drop with attrition coming at 20.9 per cent. Similarly, HCL Tech saw its attrition coming down by 220 basis points at 19.5 per cent during the fourth quarter.

Topline worry

Another worrying feature of FY24 is likely to be the disconnect between revenue accretion and the large deal pipeline. Though all top four and many mid-tier firms like LTIMindtree and Tech Mahindra bagged a decent number of large deals, it has not been added to their top line. “This disconnect between good booking numbers and revenue decline is due to the erosion of existing business. There is also some lag, as the large cost-saving deals take time to ramp up (or execution delay),” said Bendor- Samuel of Everest Group. This combination of factors will continue to exert pressure on the operating margins of most IT firms. With BFSI vertical contributing more than 30 per cent of the business facing stress, margin support may only come from falling attrition and rupee fall.

Interestingly, FY24 will be the year when divergence in performance will emerge within the mid-tier space. Many of the mid-tier firms with high exposure to the BFSI sector and client concentration are likely to face growth pangs. The year is clearly going to be a tough one for the Indian IT industry with some green shoots likely towards the second half. Till then, IT firms will continue to press the cost savings button to correct past excesses.