Indian IT firms’ growth momentum to continue despite talent crunch

Pune: Indian IT services providers are expected to perform well going forward, despite challenges in sourcing talent, a new report by HDFC Securities showed.

According to the report—titled ‘Hit Refresh’—the growth outlook for the information technology sector remains strong with improving probability of sustained momentum.

The strong momentum/resilience in mid-tier IT is also likely to continue, based on deal bookings, with a slight moderation in the share of Tier I total contract value (TCV) in the June quarter compared to global peers, said HDFC Securities analysts Amit Chandra and Vinesh Vala in the report.

Over the last few quarters, IT companies have been reporting an uptick in large deal wins, as clients across sectors kick off their digital transformation initiatives.

The drivers for software product development, and engineering, research and development (ER&D) supported by operation technology integration, digital twin and ESG (environmental, social and governance) are leading to increase in deal size and industry consolidation, the report stated.

“Our deal tracker data indicates an uptick in the energy and utilities vertical and continuity of strong bookings across the BFSI (banking, financial services and insurance), healthcare and manufacturing verticals and an increasing number of larger (multi-year) cloud deals (Azure, AWS), channel expansion (Google Cloud) and strong growth in leading cloud platforms,” Chandra said.

HCL Technologies saw acceleration in its cloud business during the quarter, reflected in the multi-year deals covering areas like migration and implementation of cloud smart strategy and management of large hybrid cloud landscapes.

The healthcare vertical has consistently outperformed over the past four quarters with healthy double-digit, year-on-year growth following the coronavirus outbreak. The retail business, which had slumped in the early days of the pandemic, rebounded during the first quarter, growing at 23% year-on-year, while manufacturing too grew 17.3% year-on-year after flattish growth in the previous quarter.

Tata Consultancy Services Ltd. (TCS) witnessed a mix of deals of all sizes and distributed across industry verticals and geographies.

Of the new deal wins worth $8.2 billion, BFSI had a TCV of $2.2 billion, while the retail vertical achieved an all-time high order book of $1.5 billion for a second consecutive quarter.

Wipro Ltd. secured a multi-year, multi-million-dollar contract from a US-based healthcare company in the quarter, to consolidate its entire on-premise and cloud infrastructure operations, as well as end-user services.

Attrition has increased across the board on account of supply-side inflation.

Chandra, however, said this is expected to taper in the next one-two quarters.

“There are multiple interventions to defend margins against the inflationary impact, which include pricing increase (mid-year revision), further increase in offshore mix (supplemented by extension of return to workplace timelines), scope for pyramid restructuring, and training intensity to support faster deployment of billable resources,” he said.

Other factors include a sharper focus on profitability, supported by staffing concentration in strategic accounts and accounts with better margins. This will be more challenging for mid-sized firms with higher subcontracting costs, with costs rising 19% quarter-on-quarter against 11% for Tier I firms.