Outsourcing is India’s most visible industry. Analysts should be wary of large software companies like Infosys Ltd. and Tata Consultancy Services Ltd. because of fears of a global economic recession.
They aren’t worried about the slow December quarter or the current financial year ending in March. The 12 months from April could prove to be more troublesome. Analysts are comparing the 2012 sovereign-debt crisis in Europe as the epicenter of pessimism. Repetition of this experience could make a recovery shallow and slow.
Although a slowdown seems inevitable, Tata Consultancy’s Monday financial results provided few clues to gauge its extent. The expansion of a decade-old partnership with British retailing client Marks & Spencer Group Plc and a deal signed with American biopharma company Gilead Sciences Inc. seems to have compensated for the European nervousness.
India’s largest software exporter saw $7.08 billion in revenue. This is an 8.4% increase over the December 2021 quarter. The net income of $ 1.3 billion was almost unchanged from one year ago.
In a press conference after the earnings, Rajesh Gopinathan, Chief Executive Officer, stated that everyone was cautious going into December. “But this caution has a different shade across markets.
The Mumbai-based company isn’t taking any risks. The company has reduced its workforce by just over 2,000 employees, marking the first reduction in headcount since June 2020. TCS’s operating margin has increased to 24.5% from 23% six months ago. TCS’s profitability is just one aspect of the story. Investors also need to have a better understanding of the entire order book. Analysts project a 10% increase in dollar revenue for TCS and Infosys’ Bengaluru-based rival Infosys.
This is a little optimistic. If the slowdown in the future is similar to the 2008 financial crisis and the pandemic, which opened the floodgates for new orders, it’s reasonable that such a turnaround will occur quickly. Clients may need to be more confident if the European malaise of 2012 is used as a comparison.
Investors will therefore pay attention to Infosys’ earnings report released on Thursday. The No. 2 Indian player had so misunderstood 2012’s funk and its impact on European bank clients that it canceled its quarterly revenue guidance for July 2012. It had repeatedly failed to live up to its promises.
In a note to clients, JM Financial Institutional Securities Ltd., based in Mumbai, stated that consensus estimates overestimated Infosys’ initial guidance during the Eurozone crisis of 2012. A similar trend could lead to a gradual downward revision of earnings over a prolonged period.
Pandemic-era staffing is another problem. TCS saw a 172,000-person increase in staffing since June 2020 as clients scrambled to digitize their supply chains. This demand has returned to a normal pace. However, many corporate customers are still waiting to see if they can develop large, cost-cutting IT projects.
Sunil Chemmankotil (CEO of Teamlease Digital) said there had been a significant dip in hiring, unlike in years when it was necessary to compete for talent.
Two things can be done to help with recruitment: It stabilizes current margins. It also lowers employee attrition, which is still high at 21.3% at TCS last quarter. This is due to workers having lower expectations about their pay.
IT outsourcing companies create 70% of Indian code-writing jobs. Local startup industries are the other major employer. They are reducing their workforce due to a funding crunch. Software engineers are being reminded that quitting their job may not be wise this year.
Even though profitability is steady for Indian software exporters due to tighter control on staff costs and a 10% drop in the rupee against USD over the past 12 months, there are still risks that the order book could be affected by European clients canceling or delaying large IT projects. The bigger concern now is a repeat of 2012.