Indian IT services companies have exhibited healthy revenue growth in the third quarter of the current financial year. It reported one of its strongest third quarters in the past five years and delivered a quarter-on-quarter (QoQ) revenue growth of 4.9 per cent.
The growth was primarily driven by increased technology spends across all key industries, (despite adverse seasonality), pick-up in deal sizes and faster conversion from pipeline to orders. As per a report by Motilal Oswal, 2021 also looks positive for the Indian IT services companies with an increase in deal Total Contract Value (TCV) and pipeline across companies. Demand for multi-year digital and cloud transformation projects from clients is expected to further improve the long-term visibility in the IT services space.
The report also observes that there was robust headcount addition by the Indian IT services companies during the quarter on the back of record high utilisation and the total headcount addition for the third quarter of the current financial year stood at 39,000 as against a net decline of 3,000 employees in the past nine months. This came in the back of the highest ever utilisation reported by the Indian IT services companies. Interestingly, it has been observed that the attrition for the third quarter was the lowest ever at 11.3 per cent versus 16.2 per cent in the corresponding period last year. However, it is expected that the attrition may rise over the next few quarters, despite wage hikes expected in the fourth quarter and first quarter of 2021-22. This may be a worrisome phenomenon for margin performance of the IT services firms as a rapid rise in attrition may require intervention.
The Motilal report also observes that the Covid-19 lockdown continues to act as a tailwind on margins in the third quarter, with a higher offshore mix and lower travel expense which has aided in the operating margins of these firms. The recent deals and acquisitions by Indian IT services firms such as TCS acquiring Postbank Systems and Pramerica, Infosys's deal with Rolls Royce and Daimler, and Wipro clinching the Metro AG deal suggests higher offshoring intensity and cost take out, indicating higher comfort with offshore delivery by large customers.
It is expected that there could be multi-year deal wins for Indian IT services companies in cloud migration, digital transformation, etc. Customers are expected to normalise their budgets to increase spending on digital transformation. Going ahead, there could be a healthy order book for the Indian IT services firms.
Recently, the National Association of Software and Services Companies (NASSCOM), in its strategic review 2021, had also projected that the Indian technology industry continues to add revenue and jobs despite the global economic and health crisis in 2020. This came at a time when global output is estimated to have shrunk by 3.2 per cent, led by the 2020 pandemic, Indian technology sector rallied round to grow at 2.3 per cent year-on-year on the back of rapid acceleration in digital transformation and technology adoption.
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NASSCOM observed that despite challenges in 2020, the Indian technology segment contributed 8 per cent relative share to the national GDP, with 52 per cent relative share in services exports, and 50 per cent share in total FDI (based on FDI inflows for the period April to September, 2020). It was also observed that despite the downturn, Indian technology industry continues to be a net hirer with significant focus on digital upskilling. The industry is expected to add over 138,000 net new hires in FY 2020-21, taking the total employee base to 4.47 million in FY 2020-21. Digital talent pool is expected to cross 1.17 million, growing at 32 per cent over the previous year.
NASSCOM further observed that investment in digital continues to rise as an imperative for the industry, with organisations building their capabilities and aligning business models to digital practices. Upto 28-30 per cent of the IT industry's revenues were recorded for digital. It also observed that domestic digital adoption had intensified in the year 2020. The Indian domestic market, driven by hardware-led demand also continued to show resilience, growing at 3.4 per cent in the year. With an increased focus on innovation, India also witnessed more than 115,000 tech patents filed by companies in India in the last five years.
