In the last two years, TCS, Infosys, and Wipro have been profitable and their salaries are increasing. But now their margins are at risk because of a potential economic slowdown in the US. The recession could prolong wage costs and reduce attrition from job seekers who are considering new jobs in the IT sectors.
The Indian IT sector is experiencing a wake of the Covid pandemic from companies like TCS and Infosys. Although they are dependent on European and US markets, they generate 80-90% of their revenue on those markets.
Recession may lead to a slowdown in the IT sector
With concerns of economic slowdown in the US and Europe, many IT companies have already been affected by this. These worries will continue to affect these companies’ profitability as they are already under stress right now.
Experts say that slower revenue growth and lower wages will help reduce attrition.
IT companies from India, such as Infosys, had a large amount of revenue from clients in the US and Europe. Both these areas are going through economic hardships such as an increase in inflation and a decrease in GDP growth rates.
According to a Crisil report, the Indian IT sector is expected to make 19% more revenue by the end of fiscal year 22. But the recession in US moderate the growth of Indian IT sector at least for two years.
This report predicts that revenue growth will slow down to 12-13% in this financial year and 9-10% in the next, because of inflation and a reduced investment in corporate capital.
“An Economic slowdown in the US and EU could lead to a decline in job growth and wages.”, said Dhananjay Sinha, head of strategy research and chief economist at JM Financial.
|Revenue||₹3,55,931 crore||₹2,22,113 crore||₹1,41,036 crore|
|Wages||₹1,99,368 crore||₹1,19,527 crore||₹78,245 crore|
|Net profit||₹71,011 crore||₹41,569 crore||₹23,093 crore|
Recession and higher attrition rates – A dual problem for IT companies
Research firms have suggested that with an attrition rate of 28.4% in Q1 FY23, Infosys will be unable to recover the margins it has lost.
“ICICI Securities” said that in the start of FY23, the lower margins due to increased attrition rates may have given companies a false sense that their problems are over.
What are the effects of wage hikes and attrition rates on IT sector over time?
Adam Sinha, CEO of Myntra, claimed that wage hikes and attrition rates could turn down by the December quarter this year. Sinha also stated that IT companies will be relieved from attrition rates, as well as startups facing funding crunch for IT executives.
Infosys has made tough decisions to try to maintain profitability amid the current economic downturn. Infosys has cut its employees’ variable pay by 70% while Wipro held back certain types of bonuses and delayed the payouts for employee of certain categories.
TCS already switched to 100% variable pay days, so what will happen next?
Economic slowdown in the US is already showing signs of spillover in the Big Tech revenues for Amazon Web Services, Microsoft Azure and Google Cloud.
Media sources indicated that the IT companies in question lost 33% of their revenues due to automation.
A slowdown in the Indian market and the macro environment may have negative impacts on your IT budget, and slower growth. Therefore, the Indian IT sectors need to look for external services from other countries as well. It cannot be denied that the US and Europe are the biggest markets for the Indian IT sectors as these two countries alone provide 80-90% of the revenue. Until the market recovers, other external services may be an option for IT companies to recover their losses.