Thursday, June 20, 2024

Accenture’s layoffs signal tough times for India’s IT giants

IT consulting giant Accenture shocked the industry by announcing plans to trim its workforce by 19,000 over the next 18 months. Around 40% of Accenture employees are based in India and around 7,000 jobs will be eliminated in the country. A regulatory filing shows Accenture’s global workforce increased to 738,000 in February 2023 from 699,000 in February, 2022. Many other digital giants have announced workforce cuts in 2023 including Google (12,000 workers), Twitter (4,000), and Microsoft (10,000). 

Accenture said the rightsizing would mainly affect “non-billable corporates”. This means people in support functions will be let go, not revenue earners.  It pointed to “significant economic and geopolitical uncertainty in many markets, which has impacted and may continue to impact our business, particularly with regard to wage inflation and volatility in foreign currency exchange rates”.

Accenture earned revenues of $15.8 billion in FY22, which translates to 5% growth in USD and 9% growth in euros. It has also cut estimates for this fiscal. Having earlier projected annual revenue growth of 8-11%, it now expects 8-10% growth. 

The big Indian IT services outfits have not yet followed suit but their Q4 results (Jan-Mar 2023) and the associated guidance and hiring are expected to be on similarly pessimistic lines. The Q3 results did show marked moderation in hiring, and guidance about revenue growth were moderate, with many words of caution. 

TCS cut its headcount in Q3 (Sep-Dec 2022) from Q2 – the first time its headcount declined since Q1 of FY21 (April-June 2020), when the covid-induced lockdown went into force. By December 2022, TCS’s employee strength was down to 613,974 from 616,171 in September. 

Wipro reduced its headcount by a net 435 employees in Q3, FY23 after a low net addition of 605 employees in Q2. The tech major had a total workforce of 258,744 in December 2022 after adding 15,500 employees in Q1, FY23. 

Hiring has also slowed at Infosys. Between FY20 and FY22, the company averaged a net addition of about 36,000 employees a year, or about 9,000 a quarter. By end Q2 FY23, Infosys had a headcount of 345,218, indicating net hiring of 32,000 in the first half. But it added only 1,627 employees in Q3, taking its headcount to 346,845, well below the earlier trend. 

HCL Tech added a net 2,945 employees in Q3, taking its total headcount to about 220,000. But its hiring has also slowed since it added over 23,000 employees in the first six months. 

Subsequently, there’s been a big shakeup in the global banking and finance world. This is critical for Indian IT since the banking, financial services and insurance (BFSI) segment is the single largest contributor to revenues for these firms. 

The impact of the bailout of Silicon Valley Bank and the buyout of Credit Suisse at a deep discount has dealt a severe blow to sentiment and fears of a contagion persist. These are in addition to fears about persistent inflation, which prompted the US Federal Reserve to make its ninth consecutive rate hike this month. 

Most major central banks are likely to follow suit. This is in general bad for the BFSI sector. Profitability falls for financial businesses when interest rates rise. One reason is that the value of loans made at lower interest rates declines, which means mark-to-market treasury losses. This was the main reason why SVB got into trouble. Another reason is simply that credit demand declines as interest rates rise. This has caused BFSI clients to cut their IT budget and postpone non-essential projects.    

The inflation and the volatility Accenture mentioned is another point of concern.  The rupee has slid consistently against the US dollar but has swung in both directions against the euro and the British pound, and strengthened against the yen. 

Rupee weakness against the US dollar is good for IT companies since a large proportion of their earnings are USD-denominated and much of their costs are rupee-denominated. But currency fluctuations require careful treasury management and that imposes hedging costs and requires constant renegotiation of rates with clients and others. 

Most importantly, IT services companies like TCS, Infosys, Wipro and HCL Tech are all big players in the global BFSI space (as is Accenture). They all derive 30% of their earnings or more from this vertical. Wipro generated 30.5% of its FY22 revenues from BFSI, Infosys 31.4%, and TCS 39%. HCL Tech doesn’t offer a segment-wise breakup but BFSI is a big part of its ‘IT & Business Services’ vertical, which yields 70% of its topline. 

The crisis in banking confidence and the generic squeeze from higher interest rates will hit this segment hard. That means the stock market is braced for moderation in Q4 guidance across the IT sector, and probably further cutbacks in hiring.

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