Indian IT riddle: Rising salaries on one side, crashing stocks on other
While a dip in profit prompts some investors to dump the stocks, IT companies take a longer view and see the industry fundamentals shifting drastically in their favour in the coming years
The proverbial question — is the glass half-full or half-empty — has split the Indian IT industry in the middle.
The techies, who are now a 50-lakh-plus-strong community, the largest chunk of white-collar employees in India, would say a definite ‘yes’. A five-year-old Java programmer, one of the skills in huge demand, is now going for an annual package of Rs 20-25 lakh, double the 2019 salary, according to a Hyderabad-based IT recruiter.
Infosys employees have received three salary hikes in the past 18 months. Along with generous pay hikes, Wipro employees are now eligible for quarterly promotions. Every company is offering out-of-turn hikes, promotions and bonuses to hire and retain talent.
IT companies are expanding frantically and in the last financial year, they added 4.5 million employees, nearly a 10 per cent addition to their workforce. In an industry where revenue is linked to the headcount, the rising number adds to the optimism of senior executives, who sense a growing demand for their services.
Wipro Chief Executive Officer Thierry Delaporte said in July: “Despite the uncertainties of the macro-economic environment…the demand for our IT services is robust. Our overall pipeline is actually in fact at an all-time high.”
IT stocks take a cut
Yet, IT stocks have crashed over the past few months, touched new lows, fought back occasionally only to dip again. Tech Mahindra, Wipro and HCL shares are down more than 40 per cent from their 52-week high. Name any large, medium and small IT company, and it has taken a steep cut.
The problem started with attrition. As companies got into an all-out hiring war, employees started switching jobs to join the highest bidder every few months. The industry is grappling with a corrosive attrition, which has touched 30 per cent even in large companies like Infosys.
When employees quit midway, ongoing projects are disrupted and clients scream at their vendors, threatening to roll back the outsourced work. The mounting attrition pushed up the cost of hiring and retention. And, the bottomline of these companies, which count salaries as their biggest expense head, took a hit.
Inflation brought in another challenge. With the prospect of the US Fed hiking interest rates, Foreign Institutions Investors (FII) started moving money out of emerging markets, which become less profitable for them in this situation. Since last October, FIIs have pulled out $33 billion from the Indian stock market, bringing both foreign exchange reserves and the rupee under pressure. They dumped the shares in their favourite sectors like IT and banking, irrespective of their fundamental strength.
The rising interest rates in the US has already triggered a technical recession in that country. A widely published Bloomberg report recently suggested that the recession would reduce demand for Indian IT companies, which are already facing a year-on-year dip in their revenue and profit.
Two time zones, two views
The discrepancy in the two perspectives owes itself to the different time zones inhabited by the protagonists. Analysts, large investors like mutual funds and, to some extent, the media, live from quarter to quarter and are obsessed with annual returns on investment. A dip in profit, however temporary, is a red flag and prompts them to dump the stocks.
The IT companies take a longer view and see the industry fundamentals shifting drastically in their favour in the coming years. Former Infosys chairman Nandan Nilekani noted recently that the Indian IT services sector took 30 years to become a $100-billion industry in revenue and just 10 years to add another $100 billion. “The third $100 billion will come in three to four years,” he said.
Decades ago, Indian IT companies started as the world’s back-office, where they could remotely maintain clients’ IT infrastructure and applications, run call centres and simple business processes. Though they were limited to clerical and low-end tasks, IT companies made relentless investments to move up the value chain, to graduate to more complex technologies and tasks.
In the last 15 years, the dramatic rise of consumer technologies like smartphones and social media began to change the archaic world of large enterprises as well. The new ‘digital’ technologies — cloud computing, automation, artificial intelligence, big data and so on — are at different levels of maturity, but promise to make enterprises more agile and efficient.
Large companies in the West need experts who understand their businesses and help them deploy new technologies, and this is where ‘services middlemen’, the Indian IT companies, step in.
The sheer disruption caused by the COVID pandemic accelerated the demand for new digital services by 5 to 10 years, according to an estimate, and created a huge business opportunity for Indian IT. In 2018, Infosys drew 26.8 per cent of revenue from digital and the rest from traditional services. By the end of the June 2022 quarter, the share of digital, which represents the future, had jumped to 61 per cent.
Cloud slice poised to grow
There is, indeed, a concern on how the recession in the US would impact Indian IT. Several surveys of the Chief Information Officers (CIOs) in the US report that IT budgets are shrinking 10-20 per cent. But most of them say they will continue to invest in cloud and outsourcing.
The task of migrating companies from private data centres to clouds, where they rent computing resources as per their need, and rewriting their existing applications seem to be relatively immune to recession.
Microsoft, the world’s second-largest cloud vendor, declared its quarterly result recently. While the Windows and the gaming businesses were hit by recession, cloud revenue grew to $25 billion, up 28 per cent year-on-year. Indian IT companies are the services middlemen, who help clients move to Microsoft’s cloud.
According to Bloomberg Intelligence senior analyst expert Anurag Rana, cloud gets less than 20 per cent of the global annual tech spend of $2 trillion, a slice which is poised to grow. With their scale, competence and track record, Indian companies are at an advantage as the digital technologies take off. This is what makes them so confident.
In the recent earnings call, Infosys’ Chief Financial Officer Nilanjan Roy said: “We don’t want to leave a five-year demand on the table because of short-term cost pressures. And these, we can optimise over this year and over the future as well.”
The man seems to know what he is saying.