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Published: May 29, 2023
Updated: May 29, 2023

IT Sector Faces Profit Slump, Impacting Hiring and Paychecks in India

The information technology (IT) sector, which experienced a remarkable boom worldwide, including in India, following the 2020 pandemic-triggered shift to cloud-based platforms and remote work, is now grappling with challenges. While the sector initially thrived with increased demand and profitability, recent trends indicate a slowdown, leading to a decline in hiring, stagnation in profits, and limited salary hikes for IT professionals.

Profit Decline and Hiring Slowdown:

The IT sector's share in the overall corporate profits pool has plummeted to a five-year low of 9.7% in the March quarter, marking a significant drop from its peak of 34% in the same period of 2020. This decline, nearly 3 percentage points over the past year, has impacted the sector's growth trajectory. As a result, there has been a slowdown in hiring, with IT companies becoming more cautious amid global macroeconomic uncertainties and a banking crisis in the US and European banks.

Challenges Faced by the IT Sector:

The IT sector, which enjoyed a dream run during the pandemic, has encountered headwinds in recent times. The sector's profit contraction of 10.5% from a year earlier represents the first yearly decline in eight quarters. Additionally, the sequential drop in profits was nearly 7% in the March quarter, while the topline growth slowed to 12% from a year earlier.

Margin Pressure and Employee Costs:

The IT sector has faced margin pressure due to elevated employee costs, which account for a significant percentage of revenues. Employee costs as a percentage of revenues remained high at 48.5% in March, with a quarter-on-quarter increase of 90 basis points. The average employee cost for the top four IT companies rose by 300 basis points from pre- pandemic levels, further impacting profit margins.

Outlook for the IT Sector:

Analysts predict that the challenges faced by the IT sector, such as issues in the banking, financial services, and insurance (BFSI) industry and concerns about a global economic slowdown, are likely to persist. The June quarter is expected to be weak due to the full impact of the banking crisis and the broader economic slowdown on financial performance. However, experts anticipate stabilization of margin pressures in the coming fiscal year and potential expansion thereafter.

Companies should stress on maintaining steady order lines amidst global slowdown

The IT sector witnessed a tremendous boost globally, including in India, during the pandemic as businesses embraced cloud-based platforms and remote work. This led to increased demand, record-high hiring, and attractive paychecks for IT professionals. However, recent challenges, including a profit slump, hiring slowdown, and margin pressures, have dampened the sector's growth. While the sector's outlook remains cautiously optimistic, with future revenue visibility stemming from technologies like cloud computing, artificial intelligence, cybersecurity, and digital transformation, it is essential to navigate the current market conditions and adapt to evolving dynamics in order to regain momentum.