India's top services outfits still growing strong, but bracing for tough times

Demand for consulting eases and that's often – gulp – the canary in the economic coalmine

Despite economic uncertainty, India's four major IT outsourcers – Infosys, HCL, Wipro and TCS – have reported strong growth and a healthy pipeline of new contracts, but also warned of likely future slowdowns.

Revenue

For the Q2FY23 year ended September 30, 2022, Infosys pulled in the most year-on-year revenue growth with 13.9 percent. HCL followed up with 10.4 percent, followed by Tata Consultancy Services (TCS) at 8.6 percent and Wipro at 8.4 percent. This led to quarterly revenues of $4.5 billion (Infosys), $3.08 billion (HCL), $6.87 billion (TCS), and $2.8 billion (Wipro).

Pipeline

Infosys's total contract value (TCV) came in at $8.1 billion, with 27 big new deals in Q2. CEO Salil Parekh said that the company's digital business grew 30 percent.

HCL grew its pipeline six percent on a TCV basis to $2.38 billion. The company said it has eight large services deals and three significant product wins in the pipeline.

"Our pipeline remains healthy and well distributed across large and medium-size opportunities," said CEO C Vijayakumar.

In Q2, Wipro signed 11 deals with a TCV of $725 million. The company said its overall order book in TCV terms grew 24 percent year-on-year.

TCS called its pipeline "robust." The company's total contract value for Q2 stood at $8.1 billion. "While the strength of our order book as well as the pipeline for Q3 is somewhat comforting, given the volatility, we remain very vigilant and are staying very close to our clients," said CEO Rajesh Gopinathan.

About those economic slowdowns

Gopinathan said despite the volatility and possible economic slowdown across the globe, TCS hadn't seen any change in client spending.

"As you could see from the growth figures, demand for our services continues to be strong in Q2 across all verticals and all markets even in Continental Europe and UK, where the pessimism levels are at the highest," said the CEO.

Parekh said Infosys saw some segments affected by worries about global conditions, but had no significant events like project cancellations:

We didn't see any project cancellations in the quarter. We saw some slowness in discretionary spend within the macro segments that I mentioned. For example, in hi-tech, we saw that. We saw some in telco. We had mentioned last quarter in mortgages within Financial Services and the retail parts of retail industry. That's how we saw it for this quarter.

Meanwhile, HCL's Vijayakumar said he feels a slowdown will come in the second half of 2023 and has baked that revenue guidance, which the company predicts to grow at 16 to 17 percent year-on-year in terms of constant currency.

Wipro CEO Thierry Delaporte namechecked a few of the events contributing to market fluctuations: environment and weather, Ukraine, plus market conditions in US.

"We are no longer in the same market and condition that we were nine months ago or 12 months ago," said Delaporte, who added that he wasn't sure if any of it will impact the IT services industry – but that uncertainty in itself could have an effect.

Delaporte said Wipro had not seen any "particular slowdown" except that the market had changed.

However, he later outlined that Wipro's consulting business, which historically served as a growth driver, had indeed slowed down as forecast.

"We also know because it's a reality now in the industry, that consulting tends to be early cycle. So the first one to slow down, first one to accelerate, and extremely agile to adjust to market evolution," said Delaporte.

Delaporte also predicted a slowdown or recession in Europe would be experienced in the US, but would steeper and shorter in America.

"If there is a slowdown, I'm guessing it could potentially come from America now," said Delaporte. "There is something that is specific to Europe, which is more this energy crisis."

"It doesn't necessarily impact us directly, but certainly impacts some of our clients. I'm guessing, in industries like manufacturing for example, it could have an impact on Europe, if not in Q3, in Q4 we will see," said the CEO.

Operating margins

Operating margins for the big four landed in the 18–24 percent range, with all increasing year-on-year but having decreased since last quarter as inflation takes hold. TCS experienced the highest operating margin in Q2FY23 at 24 percent, followed by Infosys at 21.5 percent, HCL at 18 percent, and Wipro at 15.1 percent.

"Looking ahead we believe the supply side issues have peaked and should start easing in the second half of the year," said TCS chief financial officer Samir Seksaria.

Infosys changed its FY23 operating margin guidance to 21–22 percent from 21–23 percent. CFO Nilanjin Roy advised the company would likely "be at the bottom end of the guidance band."

Attrition and hiring

Attrition and hiring have been major points of attention at India's IT outsourcers. In addition to attrition being high, some companies have employed questionable tactics to keep employees onboard and under control – such as clawing back bonuses, instituting non-compete clauses, and railing against moonlighting.

Things did not get better from a year-on-year perspective, with all four players experiencing increased attrition. Quarter-on-quarter, however, results were a mixed bag.

Infosys came out ahead with the most attrition at a whopping 27.1 percent – down from 28.4 percent the quarter prior. HCL had 23.8 percent, Wipro 23 percent, and TCS 21.5 percent.

Overall Infosys added the most employees – more than 10,000 – although the company has been known to rescind offers as well. Wipro added the least number of employees, around 600.

"The technology job market, which had overheated in the last few quarters, has begun to cool off, and compensation expectations of new hires are also becoming more realistic," said TCS executive Milind Lakkad. "With supply catching up across the industry, the pressure to poach experienced talent is easing. So, we should start seeing the churn settle in the coming months." ®