Recently Rishad Premji, the Wipro chairman, said that the technology services industry, at some level, is recession proof. Will it really remain recession proof? Indian IT services companies have of course enjoyed constant growth in the last couple of years especially during the Covid-19 pandemic. For many IT services firms, digital revenue increased by around 25 per cent in FY22. As per rating agency CRISIL, the IT services will log double-digit revenue growth this fiscal, at 12-13 percent, driven by digitalisation, strong demand for new-age technologies and depreciation in the Indian rupee. However this will be in contrast to the 19 per cent growth that was achieved in the last fiscal by the segment. This will be the highest fall in the past eight years.
Experts with whom THE WEEK spoke to feel that there are challenges and opportunities for the sector in the coming year but the growth rate will be affected. Indian IT services sector has been a beneficiary of the Covid fall out and associated surge in technology investments. While the sector witnessed a significant growth coupled with enhanced profits, technology employee attrition during the last 18 months made deliveries difficult denting growth aspirations of the sector. World economic situation and the continuing uncertainty in Europe will haunt the sector with new customer acquisition not being easy while the renewals and maintenance contracts have seen margin pressures invariably,” remarked Subramanyam Sreenivasaiah, CEO at Ascent HR.
As per CRISIL the rising employee costs to trim operating profitability through the credit outlook remains ‘positive'. As per CRISIL there would also be challenges due to the tightening of IT expenditure by corporates amid the inflationary headwinds in the United States (US) and European Union (EU), which together contribute almost 85 per cent to the sector’s revenue. However, revenue growth has support from the shift in various industries globally towards automation, digitalisation and digital transformation services in the wake of the Covid-19 pandemic. Also, the higher growth in the last fiscal had come on the back of a modest uptick of 6 percent in fiscal 2021, which was hit by the first wave of the pandemic.
Experts at CRISIL also expect that operating profitability will also remain healthy, but could fall back a tad to the pre-pandemic low of 22-23 percent, compared with 24 per cent during the last fiscal, due to rising employee cost and increasing travel expenses. At the same time credit quality of the sector, however, will remain ‘positive’, supported by continued healthy cash generation, strong balance sheets, and robust liquid surpluses.
“With spending on cloud infrastructure expected to grow 1.5 times in the next three years and increasing adoption of new-age technologies such as cyber security and Internet of Things (IoT), the digital share of revenue of Indian IT service players may cross 50 per cent over the next 1-2 years (47 percent in fiscal 2022). That said, rising inflationary headwinds in key client countries may spur corporates to curb discretionary spending and moderate revenue growth over the medium term.” said Aditya Jhaver, Director, CRISIL Ratings.
At the same time soaring inflation and the Ukraine war induced supply chain problems has impacted the Indian IT sector. Of course, it is software services which helped business as well as people to get used to new modes of providing as well as accepting services in the pandemic period. Online shopping, online banking, online medical consultation and more were accepted. And remote working possibility has changed the very nature of life as well as business. When India was adapting to the new form of business the Ukraine war added further problems.
“The US is also facing mild recession which is a cause of concern for India. When the key market for India is in trouble, it is but natural for India to see a downturn. Attrition rate is very high as we see in the case of TCS and Infosys. This has led to talent hunt. This also means that industry has to pay more to hire the best talent. It is to be seen whether top IT giants would be able to retain their financial health in good spirit while not compromising on hiring the best brains. Already all IT majors have been reporting downward profit margin,” pointed out Girish Linganna, Girish Linganna, managing director, ADD Engineering India.
He says that one major challenge for IT service providers is to upgrade their technology. “It is technologies such as Artificial Intelligence and Robotics among others which is shaping up IT services. Upgrading technology also means huge investment. How many tech companies will be able to spend more on expansion? Many may be constrained to take calculated risks to become automated by adapting to digital makeover at this juncture,” added Linganna.
Many experts feel that rupee deprecation will help the IT services companies in the long run and many challenges such as margin pressures may be overcome by this depreciation. “The near-term scenario will not see a large fall due to a vast trail of projects that need to be delivered thus the impact may not be felt so heavily at this juncture. The margin pressure issues can get balanced out due to the falling of the Indian rupee, therefore bringing a positive note to the Indian IT service industry in the short term and thereby helping it to ride out the economic dark clouds gathering on the horizon,” Neeladri Bose, Director and CTO, NetConnect Global told THE WEEK.
A few experts also feel that the hiring numbers in the IT Services Sector will be lesser as compared to the last year. With a shortage of investments, the Ukraine-Russia war, and US inflation, this year's figures are unlikely to be higher than the last year’s. “The factors that will impact the IT services segment this year will be the rising inflation, global geo-political scenarios shrinking operating margins, lower attrition rates and utilisation of capacity built last year. The hiring pace this year will be almost certainly slow. Companies do not want to over hire in order to keep the bench available for deployment. They are attempting to hire solely numbers that exist with them. When it comes to numbers, it will almost definitely not bounce to last year's,” remarked Anshuman Das- CEO and co-founder, Careernet.
He feels that given this scenario in the FY 2023 the attrition rate will slow down and will be lower than FY22. Higher campus hiring numbers to keep the lateral hiring muted in H1 but the H2 should see some recovery. Larger IT services companies would continue to hire as they have got some big deals in last year and mid-cap companies and those with exposure to Europe region would be impacted. New deals would start shrinking in coming to quarters impacting the top line growth,” added Das.
Going forward as the Covid-19 clouds start easing impact on the the Indian IT services sector would be clearly felt. “Covid 19 fast tracked digitisation and automation projects across industry sectors all over the world. Indian IT services, some startups and GICs grew at a phenomenal pace. As the pandemic has started waning its impact, the growth is expected to fall. Besides this inflationary pressures are global now. This is likely to slow down the pace of nonessential spends. Thus, we shall see an impact,” said Aditya Narayan Mishra, the director and CEO of CIEL HR Services.