For Indian IT, 2023 was one of the worst years since Global Financial Crisis

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The Indian IT sector was nothing short of contradictions in 2023. On one hand, record high deal wins were announced by the top five firms—Tata Consultancy Services, Infosys, HCLTech, Wipro, and Tech Mahindra— while on the other hand, the sector couldn’t give clarity on its revenue growth for the whole year. Some firms even slashed their revenue growth estimates for the fiscal year 2024.

Adding to that, these companies witnessed many top-level exits in 2023. Senior executives with over two-decades-long stints left their existing jobs to take over bigger roles at rival companies or even mid-tier companies.

The sector seems to be gearing up for a reset, as the new leadership across companies take over and hope for demand uncertainties to start settling down. However, industry experts maintained that recovery is unlikely to happen anytime soon, especially in the first half of the calendar year 2024, as we take a look back at how the IT companies navigated 2023.

Experts called it one of the weakest years for the IT sector since the recession of 2008.

“2023 was one of the weakest years. The first year of Covid (2020) was worse but after that, you have to go back to the 2008 recession to find a worse year,” said Peter Bendor-Samuel, founder of management consulting firm Everest Group.

According to Ashutosh Sharma, vice president and research director at Forrester, 2023 was not very different from any other slow years, except for the fact that there have been too many leadership changes across companies.

“Coming to calendar year 2023, even at the beginning of the year we thought we'd actually get a decent spending growth across the globe. But those numbers did not show up. We kept revising the numbers (growth estimates) and after the six-month mark we had to obviously revise the numbers down further,” Sharma explained.

Change of guards

The series of surprises and shocks started with former Infosys president Ravi Kumar S getting appointed as the CEO of Cognizant at the beginning of the year, followed by TCS CEO and MD Rajesh Gopinathan’s resignation and another former Infosys president Mohit Joshi taking over as the CEO of Tech Mahindra. Even BPO services company Genpact’s CEO NV ‘Tiger’ Tyagarajan is going to retire in February 2024, with a new CEO BK Kalra coming in.

This was followed by several top-level exits across companies, with many veterans joining mid-tier IT companies in CEO positions. Most prominently, Wipro and Infosys recently lost their chief financial officers. Wipro’s CFO Jatin Dalal was named as the CFO of Cognizant.

Losing company veterans and important decision makers amidst a tough business environment has left some of these companies including Wipro and Infosys taking action against their former executives by evoking non-compete clauses or sending letters trying to deter rivals like Cognizant from poaching senior executives.

Ray Wang, CEO at Constellation Research believes this might start to settle down in 2024, bringing more stability in terms of leadership.

But he added a caveat, “IT services firms need to realise they are not competing with each other’s human capital but they are competing with bots, and AI and this has changed the game. Take BPO as it operates today, it really should not exist in a world of automation and AI. In fact, the size of the BPO workforce could be cut by one-third in 2024.”

Hiring slowdown

Meanwhile, the hiring of freshers and laterals too has been slowing down, as companies focus on improving internal deployment and utilisation rates at the moment, which may also reflect a slowdown in demand.

In the first half of fiscal year 2024, TCS, Infosys, HCLTech and Wipro together lost 39,000 employees as compared to 81,650 added in the same period in the previous financial year.

As of the quarter ended September 30, India's Tier-I IT companies have reported a steep decline in headcount. TCS lost 6,333 employees, Infosys' headcount dropped by 7,530, HCLTech reported a decline of 2,299 employees, and Wipro was down by 5,051. Adjusting for Tech Mahindra's headcount increase of 2,307, the top five Indian IT companies overall lost 40,744 employees in H1FY24.

Moreover, there were delays in the onboarding of lateral hires at TCS by a quarter, which left over 200 new hires panicked. Accenture too joined the trend by skipping hikes and slashing bonuses for India employees, while LTIMindtree offered meagre raises of 0-2 percent. Wipro skipped pay hikes for top performers.

Record deal wins

If there is one trend we could take away from last year, it was the historically high quarterly deal total contract value (TCV) that the top IT companies were able to achieve as of the second quarter for FY24.

On the back of three consecutive quarters of over $10 billion in deal wins, TCS increased its quarterly deal win guidance to $9-10 billion, up from the previously guided TCV range of $7-9 billion.

Infosys reported its highest ever quarterly large deal wins at $7.7 billion. HCLTech added deal wins worth $3.96 billion and Wipro had an overall TCV of $3.78 billion in Q2, with its highest large-deal TCV of $1.27 billion in nine quarters.

On the contrary, some of these companies including Infosys, HCLTech and Wipro had reduced their revenue growth guidance for the upcoming quarter and full year FY24.

But this deal win trend too is likely to change from Q3 onwards. Analysts at Kotak Institutional Equities said that they expect weaker TCV in the December quarter across companies.

“We also expect weak deal TCV across most companies. Growth among mid-tier should vary considerably but should be better than that of larger players... Infosys, Wipro and Mphasis should have weak quarters, while HCLT and Persistent should report a decent quarter. TCS should be steady,” a note from Kotak’s analysts said.

Generative AI push

The only bright spot for IT companies lately has been the hype and curiosity of clients around generative AI and AI experimentation.

All the companies have been actively talking about the various ongoing experimentations and proof of concepts (PoCs) in the pipeline.

Last month, Accenture reported industry leading generative AI pipeline worth $450 million in new bookings, compared to $300 million in the full year of FY23. It also expects clients to move from Gen AI experimentation to more proof of concepts and pilots in 2024.

Similarly, TCS said it has more than 250 generative AI opportunities in the pipeline, Infosys has over 50 active gen AI projects while HCLTech is engaged with over 140 gen AI PoCs at different stages.

The catch, however, is these are PoCs that are yet to go into production and far from generating revenue immediately.

Bendor-Samuel strongly believes that most of these PoCs undertaken in 2023 will not move into production in 2024.

“This may be as high as 90 percent of the PoCs,” he said.

“However, the 10 percent which do move (to production) will indicate to the market where Gen AI does work and we expect significant opportunities to arise in these areas for the tech services firms by the third quarter of 2024,” he added.

All set for 2024?

With all of these being taken into account, it is unlikely that the IT services sector will see a quick recovery in 2024. Most of the experts Moneycontrol spoke to concurred that the uncertainty around discretionary tech spending by clients will continue at least in the first two quarters, or the first six months of 2024.

Demand for large deals will majorly come from vendor consolidation deals rather than digital transformation.

Wang said vendor consolidation deals along with AI projects, some cloud repatriation to on-premises, data strategy, cyber security, and automation will continue to drive demand in 2024.

Kotak’s analysts said while expectations are high about a recovery in discretionary spending in CY2024, enterprises across most sectors are still focused on cost-reduction priorities.

“Many have outlined cost-savings targets that stretch into 2024. The reprioritisation of spends toward focus areas of investment is not yet complete. These do not inspire confidence in a significant recovery in discretionary spending, at least in 1HCY24. We do not think IT services managements will comment about the CY2024 outlook yet,” the analysts said in their note.

Bendor-Samuel expects discretionary spending to remain depressed with the ongoing market caution and a strong “more-for-less mindset”.

“We do not expect any material acceleration until the third quarter and it will likely continue to sweeten in the fourth quarter. Overall we see 2024 as a difficult year,” he said.