IT paradox: Lots of deals, but not enough revenue

Even though they reduced recruiting, the top six information technology (IT) services businesses in India—led by Tata Consultancy Services, Infosys, Wipro, and HCLTech—scored a record number of agreements in FY24, which is a big change from the hiring boom that followed the epidemic.

 

There is yet more commonality between these firms’ fourth quarter results. They were all able to see a clear disparity between the higher deal wins and the real income results. They claimed that the persistent flaws in the global macroeconomic environment, which still have an effect on financial performance, are mostly to blame for this contradiction.

For instance, Infosys said that it secured contracts worth $17.6 billion during the year, setting a new high in transaction value. Despite this, the company lowered its revenue growth forecast for FY25 to only 1-3% from a prior 4-7%. Numerous brokerage houses have responded by lowering their target prices for the Infosys shares, including Nomura and ICICI Securities.

Robust transaction pipelines were also a strength for TCS, Wipro, and HCLTech, but they did not result in commensurate revenue growth, they claimed, mainly because of low discretionary expenditure across their clientele.

Nevertheless, in spite of these obstacles, these businesses saw an increase in manufacturing revenue, were able to generate somewhat more revenue from Europe, and made notable advancements in the fields of generative AI (GenAI) and artificial intelligence (AI), placing them at the forefront of the industry’s technological innovation.

declines in headcount

Companies include Infosys, TCS, Wipro, LTIMindtree, and Tech Mahindra lost 73,600 workers in total during FY24. The corporations ascribed this decrease to a deliberate focus on augmenting operational efficacy, which mirrors their adjustment to dynamic worldwide requirements and persistent economic incertitudes.

“The market and demand environment, along with operational efficiency, have been the main drivers of the immediate headcount reduction. However, as we transition to IP-based platforms and AI, there may be a long-term divergence in terms of headcount growth,” said Saurabh Govil, CHRO of Wipro. He went on, “But if you look at our entire portfolio, you’ll see that a lot of the work we do is manpower intensified; going forward, it will be a combination of both.”

“When we started the year we were at 77% utilisation… we had to realign some of those as growth changed and now we are at 82% utilization, our attrition has also come down significantly so that is why you see the net headcount reduction,” Infosys CFO Jayesh Sanghrajka emphasised the strategic nature of these adjustments.

Contrary to expectations, HCLTech hired over 12,000 freshmen and gained a net 1,537 new workers in FY24.

Notwithstanding the general decline in employment, the six IT firms outlined plans for expanding their workforces in FY25. While HCLTech and Tech Mahindra announced plans to employ around 10,000 and 6,000 freshers, respectively, TCS plans to hire 40,000 new hires. Infosys intends to combine hiring on and off campus in the meantime.

Request from the United States

Due to client expenditure reductions brought on by larger macroeconomic uncertainty, demand from the US—the largest market for Indian IT service companies—fell in FY24. This reduced demand caused contract conversion delays and negatively impacted revenue streams. The early 2023 bank collapses and the US Federal Reserve’s policy of keeping interest rates higher for extended periods of time disrupted agreements in the financial services sector, which accounts for at least 25% of the total revenue of Indian IT businesses, further hurt the industry.

In North America, TCS’s revenue share dropped, going from 53.4% in FY23 to 51.1% in FY24. In a similar vein, Infosys saw a decline in North American revenues, which dropped from 61.0% to 59.6%. Additionally, Tech Mahindra’s revenue share in the area decreased by 1.4%.

HCLTech, on the other hand, made a great impression on the market and achieved its fastest growth to date in the area thanks to three acquisitions for $100 million. We most likely outperformed everyone else in terms of growth (in North America). It’s our greatest increase as well. Therefore, we are leading the way in North America. And the financial services industry has seen the same thing in the last year,” HCLTech CEO C Vijaykumar said.

In the Americas, Wipro also showed stability and even moderate growth; its revenue share increased from 28.5% to 30.0% in the Americas 1 area, while it decreased slightly in the Americas 2 region from 30.8% to 30.1%.

The positive aspect

The manufacturing sectors and Europe accounted for a larger portion of these organizations’ total topline—roughly 6-20%. In FY24, TCS grew by 1.5%, while Infosys boosted its revenue share from Europe by about 2%.

Due to the area’s stronger development than North America, the majority of Indian IT heavyweights, including Infosys, TCS, Wipro, LTIMindtree, and Tech Mahindra, have been aggressively acquiring businesses in the region, which is reflected in their strategy shift towards it. This expansion in the Europe region is occurring against this background.

For example, Infosys completed its biggest purchase to date when it paid $480 million to acquire in-tech, a company that specialized in the German automobile sector. Comparably, Wipro made its largest-ever purchase of London-based Capco for $1.45 billion with the intention of strengthening its BFSI skills, which is now assisting the company’s expansion into the consulting sector.

Additionally, HCLTech concentrated on European development plan with major acquisitions like as the German ASAP Group and the Budapest-based Starschema. Com Tec Co IT was acquired by Tech Mahindra as well, making it their second-largest purchase after Satyam.

According to the company’s management, HCLTech’s acquisition of ASAP Group increased its revenue share in both its manufacturing vertical and in Europe. In Europe, the revenue share rose by 0.4%, with the manufacturing sector seeing over 1% growth.

GEN AI CRAZY

According to TCS, it has increased its focus on AI and GenAI technologies and has $900 million worth of deals in the queue. The CEO of TCS, Krithivasan, stressed the programs’ strategic significance by saying, “Our investment in AI and GenAI is not just about staying current.” It’s about leading the way and using these technologies to change both our own operating models and the companies of our clients.

HCLTech said that it was witnessing a lot of activity in the field of generative artificial intelligence, but that the transactions’ revenue contributions were still not very large. In general, customers seeking practical and tangible advantages are showing a lot of interest in AI and Gen AI-related potential. CEO Vijaykumar said, “We have had good success in developing a strong pipeline because of the successful proof of concepts that we have completed with various clients.”

gloomy forecast

Chief Executive Officer K Krithivasan said, “I don’t want to hazard a guess and say that growth would be returning in Q1 or Q2, it will be calling in too soon.” The CEO of HCLTech predicted a 3-5% annual growth rate and said that he anticipated a similar consolidation to that which was seen in FY24 and FY25.

According to a recent Crisil Ratings assessment, the persistent global economic issues have restrained growth in tech spending in main markets in the US and Europe, meaning that the Indian IT services industry is expected to witness a second year of slow growth in FY25, with moderate anticipated revenue gains of 5-7%.