Recession in the US may cool off attrition in IT sector along with revenues
- After two years of bumper profits and mind-boggling salary hikes, TCS, Infosys and Wipro – along with their employees – are bracing for a slowdown.
- Concerns of a recession in the US and Europe – the major markets for Indian IT giants has forced Indian IT companies to remain cautious going forward.
- According to analysts, the December quarter could prove to be the ‘inflection point’ as far as wages and attrition rates are concerned.
- Here we try to decode where TCS, Infosys, Wipro and other Indian IT companies are headed.
AdvertisementAfter two years of bumper profits and mind-boggling salary hikes, TCS, Infosys, Wipro and other Indian IT companies are treading on a cautious path as wages and a likely slowdown in demand add to margin woes. However, an economic slowdown in the US might not be all that bad for India IT majors. Experts believe that a potential slowdown could have a positive effect on spitballing wage costs and attrition.
A rapid shift towards digitalisation due to the Covid pandemic in the last two years proved to be a big boon for the Indian IT sector. Giants like TCS, Infosys and Wipro rely predominantly on the US and European markets, which contribute to 80-90% of their revenues.
|Revenue||₹3,55,931 crore||₹2,22,113 crore||₹1,41,036 crore|
|Wages||₹1,99,368 crore||₹1,19,527 crore||₹78,245 crore|
|Net profit||₹71,011 crore||₹41,569 crore||₹23,093 crore|
Note: Figures cumulative for FY22 and FY21
Recession and high attrition rates – a double whammy for IT majors
Now, with talks of recession in the US and Europe gaining momentum, these IT companies are already under stress. The stress due to economic slowdown in the US and Europe has reflected in the FY23 earnings guidance of these IT companies.
However, an economic slowdown in the US might not be all that bad for India IT majors. Slower revenue growth could curb wage hikes and slow down attrition too, say experts.
“Indian IT companies source a lion’s share of their revenue from the US and Europe. Both these geographies face looming macro pressures in the form of one of the highest inflationary pressures and a slowdown in GDP growth,” said a Motilal Oswal report.
After clocking 19% revenue growth in FY22, the Indian IT sector is headed for two years of moderation, according to a Crisil report.
“Revenue growth is expected to moderate to 12-13% this fiscal and 9-10% in the next, [due to] an expected tightening in corporate capital spends because of inflationary headwinds,” the report stated.
Advertisement“An economic slowdown in the US and EU could prove to be the inflection point for a cool down in wage hikes and attrition rates as well,” Dhananjay Sinha, head of strategy research and chief economist at JM Financial, told Business Insider India.
Attrition levels remain elevated – another source of margin stress
With attrition levels remaining elevated – Infosys is the worst affected with an attrition rate of 28.4% in Q1 FY23, research firms suggest that the margins will remain stressed, too.
“The companies had reduced their margin guidance at the start of FY23, but we believe continued pressure due to elevated attrition levels is likely to result in margins dropping near the lower end of guidance,” stated a report by ICICI Securities.
Wage hikes and attrition rates could simmer down come December
AdvertisementSinha explained that wage hikes and attrition rates could simultaneously simmer down by the December quarter this year. The cool down in wages across the IT sector could also help solve the attrition headache for IT companies, he said. With startups facing funding crunch, too, there could be fewer exit routes for IT executives.
Amongst the industry, Sinha said that Infosys could lead the pack as its decision to cut variable pay to 70% has shown it is ready to control costs. Media reports suggested that Wipro delayed payouts for certain employee categories, suggesting that companies are beginning to feel the pressure.
However, in contrast, TCS rolled out 100% variable pay days after Infosys.
An economic slowdown in the US is already showing signs of spillover in the Big Tech revenues – Amazon Web Services, Microsoft Azure and Google Cloud, the world’s top cloud platforms, reported a 7% decline in revenue.
This could have a direct impact on TCS, Infosys and Wipro – according to media reports, the revenues of these IT companies could be impacted by up to 33%.
“A weakening macro environment may translate into lower IT spends and slower growth for Indian IT companies,” stated a report by Motilal Oswal.
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