Demand for digital technologies to help Indian IT firms grow despite supply-side pressure

The revenue growth momentum of Indian IT services companies like Tata Consultancy Services Ltd (TCS), Infosys Ltd, HCL Technologies Ltd, and Wipro Ltd is expected to continue for the next few quarters on the back of continued demand for digital technologies like cloud, data analytics, artificial intelligence (AI), internet of things (IoT), 5G, and cybersecurity.   

Tier-1 firms posted a 2.6-6.9% sequential dollar revenue growth, while tier-2 services companies reported 6.1-12.8% sequential growth during the September quarter. Analysts at Emkay Research expect the revenue momentum seen in H1 to continue throughout FY22, led by secular broad-based demand trends, healthy deal wins, and continued ramp-up of large deals.

To be sure, the total contract value (TCV) of deal wins moderated in Q2 as deal tenures have become shorter due to clients’ urgency to execute digital transformation projects in a short span rather than signing large, longer-tenure deals, which follow lengthy due diligence and legal process.

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TCS signed deals worth $7.6 billion in Q2 as compared with $8.1 billion in Q1. Infosys deal intake stood at $2.2 billion in Q2 against $2.6 billion in Q1 and Wipro's large deal wins moderated to 580 million from $715 million in Q1. HCL was the only exception whose TCV for the second quarter stood rose to $2.2 billion against 1.66 billion in first quarter.

Seasonal factors such as lower working days and furloughs will weigh on the Q3 sequential growth trajectory. Infosys raised its revenue growth guidance for FY22 to 16.5-17.5% in constant currency from the earlier guidance of 14-16%, while HCLT retained its double-digit growth guidance for FY22. Wipro guided for 2-4% sequential growth in Q3 FY22 and remained confident of delivering double-digit organic revenue growth in FY22.

"As we finish Q3 and start to get into Q4, we will start to have a good idea of what the following financial year will look like. My own sense is the demand that we have is quite comprehensive and that will certainly continue to help us as long as we build out the new capabilities well and be part of the clients digital and cloud journey," said Salil Parekh, CEO & MD, Infosys.

The deal pipeline for the coming quarters is robust across the industry, driven by an uptick in digital transformation, cloud adoption and automation deals, according to a note from Emkay Research.

That said, the industry is expected to face supply-side challenges in the short-term due to high attrition and shortage of skilled resources.

The attrition rates in Q2, for instance, were at record highs. The attrition rate of Infosys rose to 20.1% in the September quarter, from 13.9% in the preceding quarter while Wipro’s attrition rate rose to 20.5% from 15.5% in the preceding three months. The attrition rate of TCS, lowest among peers, increased to 11.9% in the September quarter from 8.6% in the preceding quarter.

Wipro chief executive Thierry Delaporte said during the last earnings that given the demand environment, the high level of attrition is expected to continue for at least the next two to three quarters.

Industry watchers expect the supply side challenges to continue for the next few quarters despite some balancing off.

"The high attrition we saw in Q2 will ease off a little but even in 2022, the demand for niche skills will continue to outstrip supply…in some ways, it's not a bad thing because if there is demand for talent, it means the industry is on a growth path. With high growth, you may have talent attrition so one will have to find the right mix there," said Sangeeta Gupta, chief strategy officer, Nasscom.