Moneycontrol Pro Panorama | Belt tightening at Indian IT to pinch consumption

More clarity on the demand front will emerge when IT companies release December quarter results.

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The New Year has begun on a sombre note for employees of IT services companies. Several companies, including Infosys, have delayed their wage hikes for FY25, reports Moneycontrol. HCL Technologies has rolled out increments only partially till now.

Companies delayed increments and tempered hiring despite optimal utilisation levels. This is a significant change from COVID years, when companies gave multiple annual hikes and rushed to shore up their employee base. These changing HR practices can have a bearing on India’s consumer economy. IT employees are large spenders in consumer discretionary sectors such as automobiles, consumer durables and even in real estate, among others.

For investors, these developments convey important messages on the costs and profit margins front. Companies are yet to overcome the pandemic era excesses in hiring. A sharp rise in lateral hiring drove up costs, deteriorated employee pyramids and profitability. Profit margins are yet to recover to pre-pandemic levels.

With business growth slowing, companies are focusing on cost optimisation. Delay and reduction in increments can help companies rationalise costs to some extent, driving incremental improvement in profit margins. However, a substantial improvement in profit margins will be seen only when companies extract better price hikes, cost efficiencies and see a notable improvement in discretionary expenditure by clients.

The outlook for discretionary spending remains muted amid a change of guard in the US and uncertainty over trade policies. Cost take-out deals or projects that help clients save or rationalise costs continue to drive business for IT services companies. This is in contrast to technology transformation projects that drove demand during COVID years.

While analysts expect 2025 to be better than the year gone by, the recovery or the improvement is expected to be gradual. More clarity on the demand front will emerge when IT companies release December quarter (Q3 FY25) results, starting with Tata Consultancy Services on Thursday, January 9.

Talking about corporate earnings, early updates by banks do not provide a comforting picture either. HDFC Bank, the country’s largest private sector lender by assets, said its loans grew by just 3 percent in Q3. Union Bank and Ujjivan Small Finance Bank also gave muted business updates. Dinesh Unnikrishnan dissects the reasons behind their unexciting performances here.

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