Remarkable transformation.. slowdown in Indian IT services

Investors are beginning to worry that the sheer power of Indian outsourced IT firms is waning.
Shares of Tata Consulting Services have fallen 14 percent since the start of the year compared with a 6 percent drop in the benchmark Nifty 50 index, and this management group is the country’s second largest company by market capitalization. Shares of rival Infosys fell 20 percent year-on-year.
But Ganapathi Subramaniam, chief operating officer of TCS, played down the concerns in an interview with the Financial Times. “The world needs talent in technology (…) and India has a greater skill in technology than anywhere else in the world,” he said.
Information technology is a symbol of India’s economy, serving major global corporations – TCS’s clients range from AstraZeneca to Citibank, Microsoft and Marks & Spencer.
The sector is a major source of highly skilled jobs, employing more than five million people. TCS alone employed more than 118,000 first-year undergraduates, or recent graduates, in its financial year ending March 2022.
With more than 600,000 employees, TCS is one of the largest private service companies in the world – second only to Volkswagen with 673,000 employees, but ahead of UPS, the logistics group with 534,000 employees.
But some analysts doubt that IT services growth will remain as strong, especially if a global recession hits, and they worry about high levels of staff turnover in the industry, making salaries more expensive.
Nomura wrote this year that the slowdown in India’s IT services growth was “likely to be faster than expected” and predicted that “difficult days are ahead to influence technology spending”. JPMorgan promised that “the peak of industry growth is behind it”.
In early July, TCS disappointed analysts’ expectations when it reported a 10 percent rise in quarterly revenue to $6.7 billion, with operating margin down 2.4 percentage points from the first quarter of last year.
“It was a challenging quarter from a cost management perspective,” said the company’s chief financial officer, Samir Saksaria. He added that the lower operating margin “reflects the impact of the increase in our annual salaries, the higher cost of managing the talent pool, and the gradual normalization of travel costs.”
Other IT services companies have also disappointed their investors. Bangalore-based Wipro has fallen 40 percent since the start of the year after suffering several downgrades by investment banks. Tech Mahindra, another outsourcing firm, fell 41 percent.
Last month, Infosys surprised analysts when it reported a quarterly revenue increase of 17.5 percent year-on-year to $4.4 billion – better than estimates. But profit margins, a close measure of operating profitability, shrank from 23.7 percent to 20.1 percent.
However, not everyone is pessimistic. In a recent note, Macquarie Bank argued that companies such as TCS and Infosys are well positioned to weather the economic downturn.
But there are factors that cause concern. Subramaniam said TCS had offset past cost increases by increasing productivity and raising prices, or through foreign exchange gains. But this time it will be more complicated “because while the rupee has weakened against the dollar, it has strengthened against other currencies.”
In addition to travel costs returning with the easing of lockdowns, Subramaniam said the salary increase is also putting pressure on the operating margin. But Subramaniam insists the high salary costs were “abnormal”.
He said: “They (salary costs) are going to go down, that’s how we feel. But for the foreseeable future, at least for a period of two or three quarters of the year (…) If I were to hire someone. , I will now have to pay 30% more than I pay.
Previously, companies like TCS and Infosys were the top choice for millions of tech-savvy graduates, but now they are competing with hundreds of high-paying startups thanks to venture capital funding.
According to Fintracker, Indian startups raised $38 billion in funding last year, triple the previous year.
“You can never match a startup’s salary,” Subramaniam said, adding that this year’s slowdown in venture capital funding will bring “some rationality” to the rental market.
Meanwhile, TCS, founded in 1968, is negotiating a changing work culture as younger employees expect more work flexibility and choices.
“Old employees, who have been with us for 10 years or more, want to come into the office,” said Subramaniam. “Younger women are like, ‘Look, don’t force me to come,'” he said, adding that younger employees “want more flexibility (…), so we have to change our way of thinking.”

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