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Investors worry that India has passed ‘peak outsourcing’

Investors are concerned that Indian industry’s juggernaut, IT outsourcing, is slowing down.

shares in Tata Consulting Services (TCS), the back-office group that is the country’s second-largest company by market cap, is down 14 percent year-to-date, compared with 6 percent for the benchmark Nifty 50.

Rival Infosys was down 20 percent year-to-date before reporting strong results in July.

But N Ganapathy Subramaniam, TCS chief operating officer, dismissed any concerns in an interview with the Financial Times. The “world needs tech talent and they are in short supply today. And India has the largest pool of technological skills in the world,” he said.

IT services are emblematic of India’s outward-facing economy, serving large global corporations – TCS clients range from AstraZeneca to Citibank, Microsoft and Marks and Spencer. The sector is also a great creator of skilled jobs, employing more than 5 million people. TCS alone hired 118,880 freshers, or recent graduates, in its fiscal year ending March 2022.

With more than 600,000 employees, TCS is one of the world’s largest private employers, behind Volkswagen with 673,000 employees, but ahead of the logistics group UPS with 534,000.

However, some analysts are skeptical that IT services growth will continue to be strong, especially if there is a global recession, and are concerned about the industry’s high employee turnover, which is making salaries more expensive.

Earlier this year, Nomura wrote that a slowdown in growth for Indian IT services was “probably sooner than expected” and predicted “tough days ahead for technology spending.” JPMorgan considered the industry to be “past industry growth peak [it]“.

In early July, TCS missed analysts’ expectations, reporting a 10% year-over-year increase in quarterly revenue to $6.7 billion and an operating margin of 23.1%, down 2.4 percentage points from the first quarter of the year corresponds to the previous year.

“It was a challenging quarter from a cost management perspective,” said Chief Financial Officer Samir Seksaria. The lower operating margin “reflects the impact of our annual salary increase, increased costs of managing talent attrition and the gradual normalization of travel expenses.”

Other IT service companies are also disappointing investors. Bangalore-based Wipro has fallen 41 percent since the start of the year after multiple downgrades by investment banks. Tech Mahindra, another outsourcer, is also down 41 percent.

Last Sunday, Infosys surprised analysts with a 17.5 percent year-over-year increase in quarterly revenue to $4.4 billion, beating estimates. But profit margins, a closely watched industry profitability metric, shrank from 23.7 to 20.1 percent over the same period.

Not everyone is pessimistic. In a recent note, Macquarie argued that companies like TCS and Infosys are well positioned to weather an economic downturn: “Different [the] In the 2000s, Tier 1 Indian IT services companies are strategic partners – not glorified staffing providers who will be the first to bear the brunt of the cuts.”

Subramaniam agreed, saying customers could “make some adjustments, but I don’t think the spending itself will go down,” and while “people might not be buying new hardware,” they could increase spending on cloud computing, for example.

Still, there are certainly things to worry about. In the past, TCS has offset rising costs through productivity gains and price hikes or foreign exchange gains, Subramaniam said. But this time it gets trickier, “because during [the] Rupee has weakened against the dollar, [it] has strengthened against other currencies”.

In addition to the cost of re-travelling as lockdowns have eased, Subramaniam said rising salary costs were also squeezing operating margin, which depressed operating margin last financial year fell short of its target range of 26-28 percent and came in at 25 percent.

But Subramaniam insisted those higher payroll costs were “an aberration.”

“It will subside, that’s our feeling, but at least in the foreseeable future [for] about two or three quarters. . . If I hire someone, I have to pay 30 percent more [than] I pay.”

He also believes that employee turnover has peaked. However, he said he was concerned about the tens of thousands of new hires who have been working remotely and “do not know the culture of TCS”.

Once the go-to choice for millions of tech-skilled graduates, companies like TCS and Infosys now compete with hundreds of startups offering high salaries thanks to venture capital funding.

Indian startups raised $38 billion in funding last year according to Fintrackrthree times in the previous year.

“You can never match a salary that a startup offers,” Subramaniam said, adding that this year’s slowdown in venture capital funding would bring “some sanity” to the recruitment market.

Meanwhile, TCS, founded in 1968, is negotiating a changing work culture, with younger employees expecting more flexibility and choice.

“Older people from the age of 10 want to come into the office,” says Subramaniam. “The younger ones are like, Look, don’t make me come.” Younger employees “want a lot more flexibility and a lot more involvement in what they’re doing and how much time it takes them to do it,” he added. “So we need to change our thinking on that level.”

Investors worry that India has passed ‘peak outsourcing’ Source link Investors worry that India has passed ‘peak outsourcing’

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