Cooling hiring frenzy is good news for IT firms

Lateral hiring has slowed with the number of jobs being offered to the same candidate reducing.
Lateral hiring has slowed with the number of jobs being offered to the same candidate reducing.

Summary

The IT sector saw aggressive hiring in FY22 driven by a supply crunch and a robust demand environment.

High attrition rates have been a headache on the margin front for Indian information technology (IT) services providers. For instance, tier-1 IT company, Infosys Ltd’s voluntary attrition in the trailing 12 months stood at 27.1% in the September quarter (Q2FY23).

This was lower sequentially, but sharply higher year-on-year when the measure stood at 20%. The good news is that the high attrition rates for the sector are likely to gradually moderate in the coming months.

Fading momentum
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Fading momentum

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A further sequential moderation would be on the back of a slowdown in hiring trends. In Q2, net employee hiring for IT services companies halved year-on-year to 38,000, which is the lowest in seven quarters, according to Jefferies India.

This was lower than Q2FY20 (pre-covid level). “Lateral hiring has slowed with the number of jobs being offered to the same candidate reducing from over 8 last year to 2-3 now. Consequently, salary hike expectations of lateral hires moderated from 60-70% last year to 20-30%," said Jefferies analysts in a report on 12 December. “Data from Xpheno (staffing firm) shows that active job openings in IT services have fallen by 53% from a peak to a 22-month low."

This slowdown comes after the IT sector saw aggressive hiring in FY22 driven by a supply crunch and a robust demand environment. Some companies recruited more employees than what was originally planned for. For instance, Tata Consultancy Services Ltd’s target was to hire 77,000 freshers in FY22, but it finally recruited about 100,000 freshers.

Now, with freshers turning billable after training, there will be a rise in the skilled workforce thereby narrowing the gap between supply and demand. Furthermore, a jump in hiring had restricted an increase in the utilization levels of IT companies. An ebbing hiring momentum would boost utilization which in turn would aid margins.

As HDFC Securities Ltd’s analysts said in a report: “Margin pressure has peaked out and expected to improve hereon as attrition and subcontracting are normalising. Accordingly, we’re factoring a profit after tax compound annual growth rate of 10% over FY22 to FY24."

Amit Chandra, institutional research analyst, IT, HDFC Securities said: “With utilization levels expected to go up and a fall in attrition rates, earnings before interest and tax margin for the sector should rise by 70 basis points in FY24." One basis point is 0.01%.

The slowdown in hiring could also mean an uncertain near-term demand scenario. A potential recession in the US market is a looming threat.

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