Macroeconomic Challenges And Geopolitical Strife Effects Indian IT Major’s, Net Hiring Of Infy, TCS Falls Over 65% As Demand Erodes; Trend Likely To Continue.

India’s IT majors, TCS and Infosys, have reported a significant drop in hiring in FY23; while Infosys hired a total of 51,819 people on a net basis in FY23, the number is significantly lower than its previous total of 157,942 employees hired. At the same time, Infosys reported a decline of 3,611 in headcount.

Meanwhile, market leader TCS in the final quarter of fiscal 2023, added just 821 people. 

What is worrying is that this trend is likely to continue as macroeconomic challenges and geopolitical strife in these geographies (their major markets, US and Europe) continue to face problems and pose a severe challenge to Indian IT majors, with even slower hiring expected this fiscal, according to industry experts as technology spending gets effectively lower amid global uncertainty.

Hiring To Be Slower FY23: Macroeconomic factors To Blame

Macroeconomics and geopolitical uncertainty can have significant impacts on businesses around the world. One of the major effects is reduced hiring, as companies become more cautious about taking on new employees in the face of economic or political risks.

Macroeconomics refers to the overall state of the economy, including factors such as inflation, interest rates, and GDP growth. When these factors are unstable or unpredictable, businesses may struggle to make decisions about hiring and expansion.

For example, if inflation is high, companies may be hesitant to increase wages or add new employees due to concerns about rising costs. Likewise, if interest rates are volatile, businesses may be reluctant to take on new debt to fund growth initiatives.

Sunil C, CE of hiring firm TeamLease Digital, reiterates this fact, stating that India’s job market is worrisome as the lower net hiring in FY23 and the top firms’ weak outlook continues.

He further states that even when compared to the pre-pandemic year of FY19, net hiring in the coming year may be as down as 30-40%, thus pointing to the fact that the macroeconomic factors have had a massive bearing on the information technology sector.

Thus most IT giants are staring at a long cycle of no decision-making because of the banking crisis and economic downturn. The IT giants reported lower-than-expected growth in January-March; hence human resource executives are reluctant to hire new employees, stoking concern, terming the resultant low net hiring as a “worry.” 

In recent years, we have seen many examples of how macroeconomic and geopolitical uncertainty can reduce hiring in companies globally. For example, the COVID-19 pandemic caused a significant economic downturn in many countries, leading businesses to cut back on hiring and expansion plans.

However, not so for the Indian IT companies, which clocked an increase in average hiring due to the surge in demand for digital services during the pandemic; however, this trend has dropped dramatically post-pandemic. 

The Trend Likely To Continue Well Into FY24?

Earlier this week, Infosys and TCS provided an uncertain outlook for the 2024 fiscal year due to deal ramp downs, delayed closures and cancellations.

A report from brokerage Motilal Oswal said Infosys’ tepid performance in the final quarter of FY23 was surprising and is likely to dampen its growth this year. This is mainly because the Bengaluru-headquartered company suggests a significant impact on growth from discretionary business, which is the most vulnerable to pressures from the macroeconomic slowdown.

Motilal Oswal’s Mukul Garg and Pritesh Thakkar estimated Infosys’ FY24 revenue growth to be around 5.2% year-on-year in constant currency terms, which is much near the lower end of the guidance band (4-7%); this is because it takes a while for the mega deal opportunities to transform into order and revenues.

Meanwhile, at TCS, the fourth quarter management commentary was a deviation from the earlier outlook of confidence in US resilience; the view on continental Europe was also tepid, according to a report by Kotak Institutional Equities.

Slowest Sales Rise

Infosys saw the slowest sales rise in 6 Years in FY24, hovering at 4-7%

for the fiscal year 2024. India’s second-largest software exporter reported “ramp-downs” of client mandates amid an uncertain macro environment in its major markets of the US and Europe. 

The company said its revenue expanded by 15.4% in FY23, below its guidance range.

Uncertainty Ahead

Managing Director Salil Parekh called the business environment “uncertain,” saying that Infosys does not have a “clear view” of FY24 and more clarity should emerge in the fiscal third and fourth quarters. 

The view was also echoed by the larger rival Tata Consultancy Services (TCS), which also had flagged macroeconomic concerns, especially in the banking and financial services segment, at the same time reporting weaker-than-expected results for the final quarter of fiscal quarter 2023.

For the January-March quarter, the IT major Infosys posted a 7.8% on-year increase in consolidated net profit to ₹6,128 crore, below street expectations of around ₹6,596 crores. Sequentially, net profit fell 7%.

Quarterly revenue was up 16% at Rs 37,441 crore, which also fell short of analyst estimates that put it at Rs 38,796 crore, while revenue was down 2.3% sequentially.

The company declared a final dividend of Rs 17.50 per equity share for the fiscal year that ended on March 31, 2023.

The FY24 revenue forecast by Infosys was the lowest since FY18 when it clocked at 5.8% growth. In fiscal 2023, the company’s revenue growth fell below its (own) outlook of 16-16.5% in constant currency. 

The sectors that have contributed to the fall are the challenges in the banking sector in both Europe and US markets that have hurt decision-making resulting in a slowing cycle of deal closures. 

However, Infosys leaders maintained that the company continues to have an extensive pipeline, some being mega deals with clients that are focused on efficiencies and consolidation.

As per chief financial officer Nilanjan Roy, most of the revenue decline in the January-March quarter was due to a fall in deal volumes and “one-timers” like project cancellations and client-specific issues.

The sectors most affected include hi-tech, retail, financial services (mortgages, asset management and investment banking) and telecom. For example, revenue from financial services, contributing the most among verticals (28.9%) to total income, fell 1.3% in the quarter and 1.7% in the year.

The IT services company reduced its headcount by 3,611 employees on a net basis during the March-ended quarter, reflecting the weak outlook for its services. It hired 29,219 professionals on a net basis, down 46% from the 54,396 employees hired in FY22.

It ended the year with an overall headcount of 3,43,234.

Conclusion: Macroeconomics and geopolitical uncertainty has significantly impacted hiring decisions for businesses worldwide and in India. 

Indian IT companies continue to face the heat as economic or political risks are high, and companies have become more cautious about taking on new employees, and this can have long-lasting effects on employment rates and economic growth.