Understanding the Indian IT slowdown, in 5 Charts

The overall demand for technology mirrors this shift in investor perception. In a recent report, technology research firm Gartner said that global IT spending shrank 0.2% in 2022, against the 0.8% growth it estimated in October 2022. In 2023, IT spending is estimated to grow 2.4%, lower than its earlier estimates of 5.1%. This is in line with widespread concerns about a global recession. While the slowdown in IT spending is expected to be driven by devices, spending on IT services is also expected to grow at a slower pace of 5.5% in 2023, against the earlier estimates of 7.9%.

These numbers confirm the trend reflected in the consistent slowdown in the year-on-year growth rate of quarterly revenues of the four companies that have reported their Q3 results so far. The outlook on growth hinges on three questions. One, can the moderation in large, $100-million-plus deals be compensated by other deals, driven by demand in cloud and automation projects? Two, will the US continue to drive IT services, despite signals of weakening economic conditions? Three, can IT companies control costs, primarily through better employee management?

Large Deal Concerns

The number of $100-million-plus deals with the top four Indian IT companies rose from 111 in June 2021 to 134 in June 2022. Since then, it has remained flat.

Large deals tend to be multi-year projects, offering steady revenues, opening doors to other large deals, and becoming a lever to attract talent. The growth of such $100-million-plus deals during the pandemic was driven by companies stepping up on their digital investments.

The numbers have since flattened because clients, during periods of economic uncertainty, tend to prioritize projects with more immediate returns. For Indian IT majors, the challenge is to balance $100-million-plus deals with cloud and automation contracts, as well as deals that are less than $100 million but are still substantial. Infosys, for example, said the value of “large deals"—it doesn’t specify a threshold—won in the December quarter was $3.3 billion, its highest in eight quarters.

The US Question

Over the past year, Europe has faced the brunt of Russia’s invasion of Ukraine. This has had a varying impact on the four Indian IT majors. While TCS and Wipro saw a drop in the contribution of revenue from Europe, Infosys and HCL Tech’s revenue share from the region went up.

Revenue contribution of the US, though, went up in the past year for all four companies. Calendar year 2023 could be different, going by the signals from Big Tech. Microsoft, Google and Amazon have recently announced massive layoffs, of over 10,000 employees each. In an email to employees, Google CEO Sundar Pichai said the company had “hired for a different economic reality than the one we face today". TCS CEO Rajesh Gopinathan, in his recent quarterly commentary, said, “Europe is a problem, and the US, whether it’s a problem or not, time will tell." Interestingly, the revenue contribution from the rest of the world has dropped during this period.

Cost Management

In spite of the repeated mention of automation and non-linear growth, India’s IT services sector remains labour-intensive. During the pandemic, when demand rose, the sector saw a staff shortage and attrition as high as 30%. Salaries jumped as outsourcing firms competed with each other, and with startups, to retain talent. Now, that trend is reversing. Attrition rates have dropped for all four companies. Lower attrition tends to improve margins, thanks to lower recruitment costs. But, at around 20%, it remains high compared with 12% in pre-pandemic years.

The focus, therefore, has turned to managing existing talent better. In the December 2022 quarter, the four companies together raised their net employee base by less than 2,000, compared with over 60,000 during the December 2021 quarter. Such belt-tightening may go on amid macroeconomic pressures.

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