Shift in demand dynamics in the Indian IT sector
The Indian IT sector, often hailed as a global technology powerhouse, is encountering a significant shift in market dynamics in 2023.
Indian IT services companies have witnessed a moderation in growth in the last two quarters majorly due to evolving macroeconomic conditions in key markets of US and Europe. This has led to companies taking time to leverage the capacity added in the past year, optimizing their current workforce, and upskilling employees.
Factors contributing to demand slowdown:
According to domestic ratings agency ICRA, the topline growth for the Indian IT services sector is expected to come down to 3-5% in FY24. This is significantly lower than the 9.2% posted in FY23 and is owed to persistent uncertainty in key markets, resulting in slowdown in discretionary IT spending by key sectors such as BFSI, retail, technology and communication.
The BFSI vertical has been impacted due to softness in mortgage, investment banking, capital markets, and insurance segments amidst ongoing macroeconomic headwinds.
The communication vertical has been impacted because of the weakening revenue profile of telecom companies, as the investments made by the customers in 5G have not materialized meaningfully leading to reprioritization of technology spending.
The retail vertical too has muted demand for technology services as major retail customers in the US are grappling with a high inflationary environment.
Cost optimization deals are expected to take center stage and are estimated to account for nearly 45-50% of revenues of the top 20 global IT services firms in FY24. Within cost optimization, vendor consolidation continues to be a key theme, with hi-tech / software products, semiconductors, BFSI, and automotive clients focused on consolidating technology, engineering, and business process management, parking the same with one or two vendors for better pricing and execution control. This trend is expected to benefit specialized mid-tier IT companies.
Managed service providers too are expected to benefit and are expected to grow at 12.7% as they are uniquely positioned to help companies adapt to emerging technologies and optimize IT investments with agile and customizable solutions.
How are companies adapting to the changing dynamics:
Companies are working with levers such as onshore-offshore mix, employee utilization, and employee pyramid optimization to manage costs. Employees have had a mix bag of increments with many companies deferring salary hikes by a quarter while some companies have skipped increments for mid-to-senior employees.
Lower hiring is expected in near term because of slowdown in growth and lower attrition that is expected to further decline in the next few quarters. The Indian IT sector is expected to hire 40% fewer freshers compared to FY23, when they onboarded 2,50,000 engineers. Companies are increasingly relying on upskilling existing employees to bridge the talent gap.
Indian IT players are exploring newer avenues and have already captured 6-7% market share in the African market. While the region holds a relatively small share of 5% in the global IT outsourcing market, technology spending in the region is expected to reach $30 billion by 2027.
TCS and Infosys have already announced significant deals in the African continent. The players are targeting major technology spenders such as banking and financial services, government, retail and mining organization to offer e-government solutions, integrated infrastructure, platforms, and security services.
While the sector is witnessing one of its slowest growth phases, a surge in growth momentum is expected as macroeconomic conditions bottom out in the next few quarters.