By Vivek Ananth
The Indian listed IT services space is having a moment. While demand is surging, there are fears that companies can’t get enough engineers on to projects that are coming up to upgrade the tech stack of clients across the world. We dealt with this phenomenon in our Q4FY22 outlook, where we posited that the party for tech might be …
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The Indian listed IT services space is having a moment. While demand is surging, there are fears that companies can’t get enough engineers on to projects that are coming up to upgrade the tech stack of clients across the world. We dealt with this phenomenon in our Q4FY22 outlook, where we posited that the party for tech might be over. If you look at the Nifty IT’s movement over the past year, you could believe that we ‘called it’, if that’s worth anything.

It’s a bit more complicated than that. Although Q4FY22 saw sequential revenue growth slowing for two of India’s top tier IT services companies—Infosys and HCL Technologies—the duo, along with Tata Consultancy Services (TCS) and Wipro see robust demand persisting.

The four top tier companies are tilting towards more freshers after hiring from colleges surged in FY22, with TCS hiring over 1 lakh freshers and Infosys 85,000. This is in contrast to their initial plans of hiring 40,000 and 26,000, respectively, while Wipro doubled its fresher intake and has upgraded its promotion cycle to quarterly. HCL Tech’s management said it invested in hiring freshers in Q4FY22 to invest ahead of projects coming on stream.
As a whole, the four companies hired 2 lakh freshers in FY22. Most of these hires will be trained to build up the bench strength, to help the companies service projects when they come on stream.
While this may appear heartening, it also hides another metric that investors track closely—attrition. High employee attrition is one of the reasons companies are hiring freshers in droves. They will then invest in upgrading skills of these freshers, which should eventually translate into better margins when operating leverage kicks in, once revenues surge again.

‘Investment’ to create a robust bench
While explaining their guidance in terms of margins and revenue (all four expect revenues to grow in double digits in dollar terms), the management of these companies alluded to margin pressure over the next few quarters.
They also said they are taking actions to make their salary structures competitive to retain employees on rolls, and reduce attrition. This is apart from fresher hiring. This means that while revenues would grow at a fair clip, despite some demand tapering in Europe, operating leverage to boost profits will only kick in in H2FY22.

Although TCS says its subcontracting costs have plateaued, and this seems to be a trend, employee costs as a proportion of revenues in rupee terms is rising after a couple of quarters. This is expected to continue as these companies continue to ‘invest’ in talent, and scale them up to be allocated to projects.

Wipro expects Q1FY23 revenues to grow sequentially in the range of 1%-3%. This translates to 16%-18% dollar revenue growth on a YoY basis. This comes on the back of Wipro gaining nearly $2.5 billion dollars of revenues in FY22, and the company expects to grow at a fair clip in FY23 as well. This comes on the back of segments like manufacturing and engineering poised to do well. The company’s acquisitions of consulting companies will also expand its customer cohorts. And Wipro is ready to scoop more companies if it helps it acquire capabilities, rather then a large revenue stream.
TCS, Infosys, and HCL Tech are poised to use their existing capabilities to address the large demand for digital services after the pandemic broke out. TCS, while might not reach its aspirational band of 26%-28% of margins anytime soon, is still the market leader at 25% in terms of margins. Infosys expects its margins to be in the range of 21%-23%. HCL Tech expects its margins to be in the 18%-20% range. Wipro expects its margins to be in the 17%-17.5% range in the medium term.
What investors need to keep in mind is that there is a surge in demand that will have to be met. But there is a cost to any rapid growth. Technology professionals are in a position to pick and choose their roles. Companies are being pushed to adapt to this new reality, and they are picking to invest for the long haul to service their customers.
But the ongoing geopolitical situation in Europe is leading to some clients slowing initial digital transformation plans. There is also the risk of another outbreak of the Covid-19 pandemic wave affecting revenue growth. In the midst of this, investors should be ready for a rocky ride