Workforce recalibrations in Indian IT have been driven by combination of potential immigration reforms, increasing automation and margin pressure. Recent wage hike deferment and workforce rationalisation has been aided by abundant talent supply and need to reskill given the industry transition towards newer technologies. Immediate business risks are limited, with ability to reskill workforce and monetise product/platform business being the key challenges.
Media reports rife with news of retrenchments, wage hike deferments: Recent news flow and our channel checks suggest a deferment of wage hikes and potential retrenchments at major Indian IT companies. We believe this is a part of long term workforce recalibration prompted by protectionist policies globally, transition towards automation and margin pressures.
Hiring slowdown highlights breakdown of volume growth concept: While the slowdown in hiring has been quite apparent in the percentage net additions in the past few quarters, this is only likely to increase with higher automation. Automation will diminish the concept of volume growth (non linearity) with slowdown in hiring not necessarily being a lead indicator of slowdown in growth. The main challenge in this transition is growth and monetisation of the product and platform business.
Per capita revenue productivity would improve with automation: A key metric of non linearity is per capita revenue productivity which has been flat over the past few years for large cap Indian IT (with the exception of HCL Tech). Infosys despite being a leading proponent of this metric in its 2020 target has failed to show a meaningful improvement, in the absence of growth. This should likely pick up in the future with increasing proportion of automation and will also be aided by the recent workforce rationalisation at Indian IT.
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Utilisation and attrition, should keep gross addition stable although more hiring onsite: Near term gross hiring should remain stable due to high levels of utilisation and attrition. However, there will be an increasing gap versus net hiring, more so in India as companies step up hiring in the US in light of the potential immigration reforms.
Near term risks are limited, although transition remains a long term affair: Apart from the workforce activism and dealing with retrenchment, we do not believe these recent developments have any other near term business risks per se. Longer term challenges remain in the form of ability to monetise products/platforms business and reskilling the workforce. TCS and Infosys (rated Buys) remain the best placed in this transition towards digital and automation.