Indian IT companies are likely to focus on cost optimisation, going forward, analysts said, after Accenture reported its numbers for the quarter ended February 28. The company also announced that it is going to lay off 19,000 employees over the next 18 months, including over 800 of its 10,000-plus leaders. CEO Julie Sweet said the company is going after structural costs to ensure that it is in a better position.
According to Kotak Institutional Equities, Accenture’s results and outlook indicate that the demand environment is slowing down, with the nature of demand shifting to a mix of cost takeout and discretionary deals, as opposed to previously when discretionary deals led spending.
Kotak expects IT companies “with strength in addressing discretionary and cost take-outs, and heft in managing complex core modernization programs” to benefit.
The note said that the current demand environment favours those with strength in certain types of programmes and core modernisation. However, high exposure to the banking and financial services segment can impact growth for Tata Consultancy Services (TCS), Infosys, Wipro, Cognizant, LTIMindtree, and Mphasis.
Also Read: What do brokerages say on the Indian IT sector after Accenture’s better-than-expected results?
“Mphasis can have a larger impact, given its high exposure to vulnerable verticals (BFS), services (mortgage BPO) and clients (large clients in the logistics vertical). Finally, a share defence in vendor consolidation is important... These factors will serve to increase the growth differential between winners and losers in FY2024,” the note said.
Uncertain outlook
Sanjeev Hota, Head of Research, Sharekhan by BNP Paribas, told Moneycontrol that Accenture’s management was not very sure of the macro environment that is panning out currently. “In that context, most IT companies will see some kind of volatility in their earnings performance in the near term. We need to wait and watch how the macro environment is panning out,” he said.
Hota added that the layoffs have to do with cost cutting because they need to maintain their margins. At a time when Indian IT companies are also normalising their hiring outlook, “we are likely to see most companies opt for cost optimisation”.
As per a Jefferies note, Accenture’s results had three takeaways for Indian IT — (i) increasing caution and focus on cost optimisation suggesting a moderation in growth in FY24; (ii) larger IT companies positioned better than small- or mid-sized companies due to the client focus on larger deals and slowdown in smaller deals; (iii) the job market cooling off along with lower attrition and prudent hiring will support margins.
The industry is losing value
Phil Fersht, CEO of HFS Research, told Moneycontrol that spending on IT is down from 11 percent last year to 3 percent this year, and with inflation taken into account, the industry is losing value.
“What has rapidly changed is tech and operations leaders expect a commitment from their service providers to deliver tangible outcomes in clearly defined timeframes. We are seeing an increase in many projects shifting to quarterly budgeting – and being placed under considerable scrutiny to reach their desired conclusions on time and on budget,” said Fersht. “Brand new data from over 500 IT leaders across the global 2000 tells an ugly story of how quickly cloud bingeing is grinding to a halt, with only a third of enterprises currently staying the course with their current IT sourcing investments.”
He added that discretionary spending is disappearing fast. “We are seeing an increase in many projects shifting to quarterly budgeting, and being placed under considerable scrutiny to reach their desired conclusions on time and on budget,” he added.
Emkay Global said in a note that while deal bookings remained strong driven by large transformational deals, clients are turning cautious amid macro uncertainties and this has led to delayed decision-making and a pause in smaller deals. This, in turn, “could lead to increased volatility in quarterly deal bookings and likely narrowing of the growth differential between Tier-1 and Tier-2 companies,” Emkay said.
“Demand has moderated due to weakness in consulting, softness in the flow of smaller deals and slower decision-making amid macro uncertainties; nevertheless, demand remains resilient and should alleviate any concerns of a sharp fall,” Emkay said in a note.
Impact of layoffs
Pareekh Jain, CEO and Lead Analyst at EIIRTrend, said that as the main reason for the layoffs is cost optimisation, there could be less of an impact in India as costs are lower in India as compared to the rest of the world. Jain added that at a company level, the percentage of hiring in India is likely to increase. “Given the current market situation, in the medium term they are trimming out across corporate functions,” he said.
Mrinal Rai, principal analyst at ISG concurred. According to him, Accenture's decision to layoff is more about normalisation to balance the over-hiring done during 2021-22. "The services companies were on a hiring spree and overstaffed during the pandemic," he said.
Rai added that active hiring will still continue by the Indian and global IT service providers, and Accenture will be no exception. "Demand for key skills is still strong, and service providers will continue to hire fresh talent for the same," he added.
A note by Nirmal Bang Institutional Equities said the layoffs must be seen in the context of the attrition likely in this time frame as well as Accenture’s 91 percent utilisation level.
Accenture “indicated that this exercise has more to do with structurally having better control over costs and being proactive. We also read it as an indication that some of the employees hired during the pandemic phase were at much higher compensation and this is a means of shedding some of them,” the note said.
A correction that was inevitable
Chirajeet Sengupta, a partner at Everest Group, said that the sentiment going forward is that things are not falling off a cliff, and even something like the impact of the collapse of SVB and the acquisition of Credit Suisse by UBS is being managed better by regulators currently than how things were in 2008, during the global financial crisis.
“I think the world has learned a lot of lessons over the past 15 years. I don't see it as a doom-and-gloom scenario, but definitely a rationalisation in the demand environment, compared to what we had seen in 2021,” he added.
According to Sengupta, the layoffs are a correction that was inevitable as an overheated talent market cools off. “I think the market was expecting a correction. If there was a word to describe it, it would be bloat. The market was demanding a correction and in some ways, this is a sign of that. I think the labour market globally also is stabilising,” said Sengupta.
“From an industry standpoint, there’s going to be margin pressures going forward. Increasingly, IT companies will have to have a sharper choice between margin and growth in the short term. In this market, companies will still be able to grow quite successfully but margin expansion is going to be a real challenge. I don't think that the two can happen together,” he added.
