IT firms may ‘right-size’ workforce to offset costly high-skill hires

The COVID pandemic has led to several changes in the operations of information technology services providers. The increased preference for specific skillsets and the acceptance of work from home have — probably irreversibly — have changed how IT employees are hired, retained and let go.

There is heightened demand for employees skilled in digital technologies, with the available skillsets not meeting that demand. There are as many concerns about elevated attrition levels as there are about companies rationalising their workforce to compensate for increased costs.

Skill-specific costs have risen, and Indian IT firms are likely to right-size their workforce to offset this, said brokerage house Motilal Oswal in a note to investors. “Hiring across our IT coverage will continue to remain high as companies try to fulfil demand and backfill growing attrition, which will be a key focus area for investors. The resurgence of COVID cases remains another risk on the supply-side,” it said in its note.

Tier II players to do well

The margins for most IT firms appear to be in a narrow range, said the brokerage. Supply pressures like attrition and recruitment are likely to be offset by operating leverage, it added.

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In its research report titled Technology 3QFY22 Preview (Demand to outweigh seasonality; attrition peaking), Motilal Oswal said the third quarter of fiscal 2021-22 is expected to register strong demand in the IT segment. In keeping with the latest trend, Tier II players are likely to outgrow their Tier I peers, it added. “Tier II players are expected to report a robust PAT growth (around 23% YoY and 6% QoQ), driven by strong revenue growth, but partially offset by lower EBIT margins. Q3 demand recovered faster than our expectations,” it said.

Continuation of the strong sequential growth momentum and expectation of a qualitative commentary on growth beyond FY22 should help sustain the rally in IT stocks, despite their premium valuations, it added.

Upbeat outlook

It further said the IT segment will gain from strong demand, growth in digital transformation deals, price hikes and increased spend on cloud migration by clients, to name a few factors.

The optimistic outlook was shared by another report, credit rating agency ICRA, published last month. That report said verticals such as BFSI, telecom, manufacturing, retail and distribution are likely to boost the revenues of domestic IT firms by 9-12% this fiscal.

While the growth will be driven by strong demand for digital technologies from global clients, a low base last fiscal due to the pandemic may also be a reason.