Indian IT firms face a tough FY24 with all round pressure on revenue & margin

Indian IT services industry has faced a tough financial year in FY24 with hope for a better fiscal year starting April 1.

Tepid revenue growth rate, pressure on margin, low hiring, fall in headcount, disruption coming from Generative AI, leadership changes at the top level and sound deal pipeline characterised the ongoing financial year.

Though domestic IT firms will announce their Q4 and annual performance starting from April first week, most experts see big firms posting low single digit growth rates for FY24 with some witnessing contraction in annual top line. Similarly, FY24 is a financial year when the high growth of mid-tier IT firms is likely to be moderated.

Demand environment, which started weakness from the beginning of financial year, showed no signs of revival afterwards. Rather, enterprises continue to defer decisions on IT spend with only cost savings projects coming to the market. Lack of digital deals impacted the mid-tier firms and those large IT firms with high contribution of digital revenue very badly.

For instance, Infosys management had earlier said on an analyst call that high exposure to digital deals resulted in tepid demand environment. “Infosys management believes its higher exposure to discretionary work (digital business, which formed around 65 per cent of revenue) has been a key reason behind tepid revenue growth in the current environment,” a global markets research report on the Indian IT major by Nomura has recently said.

Similarly, JP Morgan report has termed FY24 as a washout fiscal year with only recovery likely in the next fiscal year. "Investors have assumed FY24 is a washout and shifted focus to FY25, hoping for a rebound,” JP Morgan has said in the report.

While growth rate remained under pressure, there was little let off on the operating margin front. Sitting on a bloated workforce, hired during the post pandemic year in anticipation of demand, led to higher wage cost.

Experts said reduction of employee count during three consecutive quarters of FY24 showed IT firms’ keenness to reduce wage cost for maintaining margin.

During April-December period, all major IT companies reduced their headcount. According to data available, the collective headcount of the top eight IT companies declined by 17,354 in the December quarter as compared to previous quarter. Employee count has fallen by around 70,000 in the FY24 so far, making it one of the sharpest fall in the last six years.

“Though hiring has started in some pockets with companies going to engineering college campuses for fresher hiring, we may not see much improvement in the employee count during the fourth quarter,” said a person from a staffing company.

Despite all the negativity, deal pipeline of Indian IT firms remained robust, giving hopes of recovery in FY25. In the last two quarters (July-December), Infosys won deals worth $10.9 billion, where as Tata Consultancy Services bagged large contracts worth $19.3 billion. Even mid-tier IT firms were also able to participate in cost takeout deals during FY24.

““Large deal pipelines are full, however, predicting the timing of their closing is becoming increasingly difficult,” Peter Bendor Samuel, CEO of global consultancy firm, Everest Group, told the Bizz Buzz. Sources in the know said IT firms continue to face delays in execution of large projects with clients giving small work orders. With the approach of FY25, analysts said Indian IT firms have to invest heavily on Generative AI along with reskilling of employees to navigate the changes in the business model.