Investors worry India has passed ‘outsourcing peak’

Investors worry India has passed 'outsourcing peak'

Investors are worried that the behemoth of the Indian IT outsourcing industry is slowing down.

Shares of Tata Consultancy Services (TCS), the back-office group that is the country’s second-largest company by market capitalization, have fallen 14% since the start of the year, compared with 6% in the benchmark Nifty 50

Rival Infosys had fallen 20 percent year-to-date before reporting strong results in July.

But N Ganapathy Subramaniam, chief operating officer of TCS, brushed aside any concerns in an interview with the Financial Times. “The world needs technological talent and today it is in short supply. And India has the largest technology skill pool in the world,” he said.

IT services is an emblem of India’s overseas economy, servicing major global corporations: TCS’ clients range from AstraZeneca to Citibank, Microsoft and Marks and Spencer. The sector is also a major creator of skilled jobs, employing more than 5 million people. TCS alone hired 118,880 new graduates in its financial year, which ended in March 2022.

With more than 600,000 employees, TCS is among the world’s largest private sector companies, behind Volkswagen with 673,000 employees, but ahead of logistics group UPS with 534,000.

But some analysts have been skeptical that growth in IT services will remain strong, especially if there is a global recession, and worry that high levels of employee turnover in the industry will make salaries more expensive.

Earlier this year, Nomura wrote that a slowdown in Indian IT services growth was “likely sooner than expected,” predicting that “tough days ahead for technology spending.” JPMorgan felt that the “industry growth peak is behind us [it]”.

In early July, TCS missed analysts’ expectations as it reported a 10% year-on-year rise in quarterly revenue to $6.7 billion and an operating margin of 23.1%, down 2.4 percentage points from the first quarter of the previous year.

“It’s been a challenging quarter from a cost management perspective,” said chief financial officer Samir Seksaria. The lower operating margin “reflects the impact of our annual salary increase, the high cost of talent management and the gradual normalization of travel expenses.”

Other IT services companies are also disappointing investors. Bengaluru-based Wipro is down 41% since the start of the year following several downgrades by investment banks. Tech Mahindra, another subcontractor, is also down 41%.

Last Sunday, Infosys surprised analysts by reporting that quarterly revenue rose 17.5% year-on-year to $4.4 billion, ahead of estimates. But profit margins, a closely watched industry profitability metric, fell from 23.7 percent to 20.1 percent in the same period.

Not everyone is pessimistic. In a recent note, Macquarie argued that companies like TCS and Infosys were well placed to weather an economic downturn: “Unlike [the] 2000s, Tier 1 IT services companies in India are strategic partners, not glorified staffing providers who will be the first to bear the brunt of the cuts.”

Subramaniam agreed, saying customers could make “some adjustments, but I don’t think spending itself will go down” and while “people may not buy new hardware,” they could increase computing spending by cloud, for example.

However, there are certainly things to worry about. In the past, TCS has offset rising costs by increasing productivity and raising prices, or through foreign exchange gains, Subramaniam said. But this time it will be more complicated, “because while [the] the rupee has weakened against the dollar, [it] has strengthened against other currencies”.

Along with the expense of traveling again as lockdowns eased, Subramaniam said rising wage costs were also squeezing operating margin, which last financial year exceeded its aspirational band of 26 to 28 percent, reaching 25 percent.

But Subramaniam insisted these higher wage costs were “an aberration”.

“It will taper off, that’s what we feel, but at least for the foreseeable future [for] about two or three quarters. . . if I’m going to hire someone, I’ll have to pay 30 percent more [than] I’m paying.”

He also believes employee turnover has peaked. However, he said he was concerned about the tens of thousands of new carpenters who had been working remotely and “don’t know the TCS culture”. 79fc 4302 a6c7 37d7f9d59315

Previously the go-to for millions of graduates with technical skills, companies like TCS and Infosys are now competing with hundreds of start-ups offering high salaries thanks to venture capital funding.

Indian startups absorbed $38 billion in funding last year, according to Fintrackrthree times the previous year.

“You can never match a salary offered by a start-up,” Subramaniam said, adding that the slowdown in venture capital funding this year would “bring some sanity” to the hiring market.

Meanwhile, TCS, which was founded in 1968, is negotiating a changing work culture, with younger staff expecting more flexibility and choice.

“Older people, 10 years and older, want to come to the office,” Subramaniam said. “The younger ones feel: Look, don’t force me to come.” Younger staff “want to have a lot more flexibility and a lot more involvement in what they’re going to do and how long it’s going to take to complete it,” he added. “So we have to change our thinking at that level.”


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About the Author: Chaz Cutler

My name is Chasity. I love to follow the stock market and financial news!