Ever since Indian IT services players reported mixed results for the first quarter of FY23, views have diverged on how the sector will fare going ahead. After the industry logged strong revenue growth of 19 per cent for FY22 helped by healthy deal wins, players such as Infosys have issued optimistic growth guidance. A CRISIL study expects Indian IT to manage 12-13 per cent revenue growth in FY23 on the high base of FY22. But some brokerages citing macro risks, have predicted speed-bumps ahead. It is true that key markets such as US and Europe, which contribute over 85 per cent of revenues for Indian IT are today beset by recession worries, which could delay spending decisions and cut into IT budgets. But global corporations have acknowledged during Covid, that IT spending is now critical to customer acquisition and retention. Through the multiple waves of Covid, Indian IT majors recorded strong deal wins arising from new investments in digitalisation by the BFSI sector, data analytics, AI and ML (artificial intelligence and machine learning) by consumer-facing businesses and migration to cloud-based services by others. Indian IT players have also weathered past global crises well, whether it was the global financial crisis of 2008 or the economic upheavals during Covid. While this offers room for optimism on revenue growth in the year ahead, IT majors may have their task cut out in delivering matching profit growth.
Despite a depreciating rupee, top-tier Indian players have seen a compression of 250-300 basis points in their operating profit margins in the latest quarter. CRISIL expects operating margins to recede from a peak of 26.5 per cent in FY21 to 23.1 per cent this year. Multiple factors are contributing to these profitability pressures. While Covid-related mobility restrictions and work-from-home initiatives saw most IT majors save considerably on travel costs and overheads, these costs have rebounded as operations have normalised. They managed to arrest the deterioration in their offshore-onsite mix during Covid, but with work beginning to move back onsite, this edge is eroding. But a newer and far more pressing challenge for IT services players, who have traditionally thrived on mass recruitment from campuses, is the scramble for talent.
As these companies have strived to move up the value-chain in new offerings built around cloud services, AI, ML in the last 2-3 years, they’ve stepped up the pace of lateral hires and effected significant increases in compensation packages for their mid- and senior-level employees. But with start-ups, Indian arms of MNCs and new Saas and product companies all vying for the same talent, pay structures have now turned irrational, sharply pushing up wage bills of the services majors. Rising wage costs are bound to cast a shadow on the margins at a time when the latter are already under pressure from other operating costs. Thecompanies are reducing variable pay for their mid- and senior-level management to balance costs but there’s a backlash from these employees. Given that attrition, running at 20-25 per cent levels now has been a big pain point, it is moot if this course-correction can be managed without losing at least a part of the mid- and senior-level talent. Skilling freshers in new-age technologies, even if this means delayed payoffs, appears to be one away out of this conundrum. As one of the biggest employers in the country, It is critical that the industry gets its strategy right.