Major Indian IT Players Apply Brakes Amid Concerns FY24 Being A ‘Washout’ Year Announce Drastic Cuts In Pay Hikes, Promotions And Hirings; Look To Reboot In FY25

In the backdrop of global economic downturn concerns, leading Indian IT players, including Infosys, have implemented significant reductions in annual salary hikes and promotions for their workforce.

According to a reports, Infosys, headquartered in Bengaluru, has granted its employees a salary increase of less than 10% this year and the trend is mirrored by global companies based in the US and Europe, which have a substantial presence in Bengaluru.

Employee expenses constitute the largest portion of the IT sector’s total expenses, accounting for approximately 50-60% during the current economic climate; coupled with reduced business from existing clients, this has prompted the IT sector to prioritize cost optimization, leading to a decrease in hiring.

The situation, initially expected to resolve within six months when it began a year ago, has persisted, compelling IT companies to implement drastic measures regarding salary hikes and new hires are not eligible for salary increases this year.

An IT professional from a US-based company remarked, “IT companies used to provide 20% annual hikes, and for those promoted, the increase could be as high as 50%. This year, promotions are deferred, and those who were promoted have received hikes ranging from 10 to 20%.”

In the current fiscal year, software firms are offering salary hikes of 18-22% to job switchers, a significant decline from the previous scenario where such candidates could command increases exceeding 40%, and sometimes even reaching 100-120%, in remuneration.

The situation is reminiscent of the challenging period between 2007 and 2009, when the IT sector faced severe setbacks. With automation and Artificial Intelligence (AI impacting job roles, IT professionals express concern about the uncertainty.

The senior HR Manager of a prominent tech company revealed, “No one knows when the phase will end, and the prosperous days will return. During the pandemic, the demand for skilled employees in the IT sector had peaked, with performers being enticed by advance bonuses and extravagant gifts. All that now seems like a distant dream.”

Nevertheless, experienced professionals assert that companies that weathered previous recessionary phases will emerge successfully once again, viewing this as a natural cycle within the IT industry.

In a communication to its staff, Infosys expressed gratitude for their unparalleled support and efforts in overcoming current challenges and ensuring success in all aspects, according to sources.

What Is Leading To The Downturn
The Indian IT services sector is currently grappling with a slowdown in the US, compounded by global macroeconomic uncertainties, leading industry experts to anticipate a muted hiring landscape despite a robust deal pipeline.

According to a note from research firm ICRA, the hiring slowdown is expected to persist over the next two to three quarters, extending into the first quarter of FY25.

The sector has witnessed a decline in hiring activity, with companies focusing on improving employee utilization in the face of weakened demand rather than backfilling attrition.

Between Q2 FY2023 to Q2 FY2024, ICRA’s analysis of sample companies revealed a net decrease of 49,606 employees, in contrast to a net increase of 245,248 during Q2 FY2022 to Q2 FY2023.

The note highlights that companies have not fully replenished attrition, opting instead to enhance employee utilization amid challenging market conditions.

Despite hopes for off-campus recruitment, the campus hiring trend is also expected to experience a downturn.

Kamal Karanth, co-founder of Xpheno, emphasized that the IT sector might witness fewer than 100,000 freshers and entry-level additions this fiscal year.

The uncertain economic environment in key markets such as the US and Europe is anticipated to impact the revenue growth of the Indian IT services industry, moderating to 3-5 percent in FY24 compared to the 10 percent growth in FY23.

The slowdown is projected to persist for the next couple of quarters, influencing overall hiring trends within the industry.

ICRA notes that while the increased employee cost as a percentage of operating income has pressured profit margins, major IT services companies have managed to mitigate the impact through enhanced operating efficiencies.

The Outlook
With macro challenges and client decision-making delays still prevalent, ICRA forecasts that revenue growth for its sample set of Indian IT services companies will moderate to 3-5 percent in FY24 from the 9.2 percent recorded in FY23.

The report anticipates a potential improvement in revenue growth in FY25, reaching approximately 6-8 percent, supported by a strong order book and deal pipeline.

The operating profit margin (OPM) is expected to moderate slightly in FY24 but remain healthy over the medium term, driven by wage cost stabilization through employee pyramid optimization and enhanced employee utilization.

JP Morgan analysts predict a challenging fiscal year 2024 (FY2024) for the Indian IT sector but foresee a potential turnaround in FY25.
Investors are shifting their focus to the latter year, anticipating signs of recovery in deal signings.

According to a recent note by analysts Ankur Rudra and Bhavik Mehta, the upcoming second-quarter financial results and commentary from Indian IT companies will be scrutinized for indications of a rebound in deal activity, as FY2024 is expected to be a “washout” year.

Expressing pessimism about the sector, the analysts highlighted a lack of substantial demand increase in recent assessments, characterizing the overall situation as less favorable than the previous quarter.

Major IT firms, including Infosys, TCS, Wipro, and HCLTech, have already cautioned about clients, mostly US-based, reducing IT spending, delaying, and canceling contracts due to economic growth slowdown and concerns about higher interest rates.

Investors are adjusting their expectations, considering FY2024 as a challenging period and redirecting attention to FY2025, hoping for a rebound. The Nifty IT index has outperformed the Nifty 50 over the past three months, reflecting this shift in focus.

Deal signings and the breakdown of new deals versus renewals will be key areas of interest in this quarter’s earnings reports, as analysts aim to assess growth prospects for fiscal 2025.

However, the analysts noted that recent discussions with industry executives did not reveal significant optimism about a demand rebound. While certain areas show promising signs, overall decision-making and deal ramp-ups remain sluggish.

JP Morgan maintains a more negative outlook on the IT sector compared to the broader market.

The firm anticipates high single-digit earnings growth for large-cap IT companies in fiscal 2025, in contrast to market expectations of double-digit growth.
Similarly, for mid-cap companies, JP Morgan expects low double-digit growth, compared to market expectations of mid-teens growth.

Despite the overall caution, Infosys has been upgraded to “neutral” from “underweight” by JP Morgan, citing lower expectations already factored in and the company’s substantial deal wins providing visibility into fiscal 2025.

The Last Bit, As the Indian IT sector faces headwinds in FY2024, investors are cautiously setting their sights on FY2025, anticipating a turnaround in deal signings and overall industry performance.

The challenging economic scenario, characterized by reduced demand and client caution, has prompted a shift in focus, with stakeholders acknowledging FY2024 as a difficult period.

JP Morgan’s projections reflect a conservative stance on the sector’s earnings growth, with expectations tempered compared to broader market sentiments.

The Indian IT sector stands at a critical juncture, steering uncertainties in FY24 and poised for potential shifts in the upcoming fiscal years.