Indian IT’s hiring freeze suggests weak demand will continue

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When the going gets tough, the tough hit the brakes on hiring. At least that’s what India’s top information technology (IT) companies have done in the past two quarters. One common theme in this fiscal year’s (FY18) quarterly results has been that while revenues have been sluggish, profit has typically beaten expectations thanks to cost-cutting measures such as improving employee utilization.

The top six India-based IT companies, referred to by the acronym TWITCH by some analysts, have reported a net decline of 10,505 employees in the first two quarters of FY18. During the same period last year, they had reported net hiring of 58,765 employees. TWITCH includes Tata Consultancy Services Ltd, Wipro Ltd, Infosys Ltd, Tech Mahindra Ltd, Cognizant Technology Solutions Corp. and HCL Technologies Ltd.

This suggests that Indian IT companies themselves aren’t very hopeful of demand picking up in the near term. In any case, investors haven’t been overly impressed by the cost control and the better-than-expected profits. Tech Mahindra’s shares fell over 4% on Thursday despite beating the Street’s estimates on margins and profit.

Thanks to the miserly approach to hiring, employee utilization has reached record levels for some companies such as Infosys. And numbers reported by Tech Mahindra suggest it has decided to do away with having trainees on its bench, perhaps a first for the industry.

As such, there isn’t much leeway in improving margins using this lever in the future. More importantly, some of these companies don’t seem to have much of a buffer in case there is a surprise upturn in demand. Having said that, as an analyst at a multinational brokerage firm points out, while the controlled hiring suggests that these companies don’t expect demand to improve in the short term, it doesn’t say anything about their prognosis for the medium-to-long term. That’s because supply of software professionals is hardly an issue in the current environment and just-in-time hiring is more feasible now than it was some years ago. It must also be noted that in the case of Cognizant, which contributed about half of the net decline in headcount, there is a well-articulated employee realignment programme that has been put in place as part of its engagement with an activist shareholder to cut costs and improve margins. Besides, its offshore utilization of 74% at the end of the March quarter provided ample leeway to cut its bench size. As such, in its case, the drop in headcount may not have much to do with the outlook for future demand.

Still, it’s interesting to note that hiring numbers are starkly different in FY18 compared to a year ago, even though revenue growth numbers at most of the top firms are similar to year-ago levels. What has changed clearly is the outlook about the future. A year ago, firms anticipated demand from the financial services segment to pick up in 2017; although things haven’t worked out as expected. On the contrary, demand from some other segments such as retail has worsened. As if all this wasn’t bad enough, companies have had to grapple with increasing uncertainty about visas under a protectionist Trump administration.

It’s important to note that the low hiring numbers have nothing to do with an increase in the use of automation and artificial intelligence. While the use of these services is on the rise, it is nowhere near levels where it can make a dent on the number of employees needed to run projects at India’s largest IT companies.

The primary reason for the low hiring is, as pointed above, an attempt to control costs in a lean demand environment. Coupled with already high utilization levels, this should worry investors about the prospects of these companies in the near future.