For over two decades, top software services companies such as Tata Consultancy Services Ltd and Infosys Ltd have been driving technology employment in the country. However, in the just-concluded financial year, their collective headcount shrank.
The employee strength of TCS dropped by 13,000 in FY 2023-24, and that of Infosys by about 26,000 and Wipro Ltd by 23,000. The only exception among the top four Indian tech services companies by market capitalization was HCL Technologies Ltd—its headcount increased by 1,537 in FY24.
Industry watchers pay attention to changes in headcount as a proxy for sales. Billings of IT services companies are based on the number of hours that employees spend on a project.
While artificial intelligence threatens to reduce employee hours, the link between headcount and sales continues to hold, at least at present.
To some extent, this explains how HCLTech bucked the trend. Its revenue growth outpaced that of Infosys and Wipro in all four quarters of the previous fiscal year, while it beat that of TCS in two quarter, and nearly equalled it in one.
TCS’s human resources head said the company has been “focusing more on utilising the capacity that we have built over the prior years”.
Still, the HCLTech stock has dropped by 11% so far this year, compared with a 4% drop for Wipro, and gains by TCS and Infosys. This is partly because HCLTech's guidance for FY 2024-25 was muted.
At a projection of 3-5% growth, it was a “tad lower than Street/our expectations of ~4–7%”, said ICICI Securities. HCLTech during its earnings call also suggested that clients' discretionary spending was yet to pick up.
While HCLTech has outpaced its larger rivals in revenues in the past two quarters, it is not the key reason why it bucked the trend of shrinking headcounts.
The key reason is the hiring behaviour of tech majors during the previous two fiscal years, especially in 2021-22. During the pandemic, due to mobility and other restrictions, companies globally started rolling out digital transformation projects taking the help of Indian IT services companies.
To service those projects, domestic IT companies hired in large numbers, expanding their employee base significantly. In 2021-22, the employee count of TCS grew by about 100,000, and that of Infosys by about 50,000 and Wipro by 45,000.
HCLTech's headcount growth in absolute terms in the previous four financial years has been lower than that of both TCS and Infosys. In 2021-22, HCLTech's headcount growth was lower than Wipro's by about 5,000 people. This moderation showed in headcount additions in FY24.
The fight for talent in India's IT sector also showed up in high attrition numbers in 2022 and 2023. Attrition rates at Infosys umped to a high of 28.4% in the first quarter of FY23, from 13.9% during the first quarter of the year before.
Similarly, TCS saw its peak attrition rate a quarter later, at 21.5% during the second quarter of FY23. HCLTech, too, experienced its peak attrition rates during those two quarters, at 23.8%. As demand for IT services weakened, attrition across these companies dropped.
The employee base shrank due to this voluntary attrition, coupled with a change in hiring strategy.
Now, companies are hiring for specific skills that are in demand. They are also hiring with the intention to keep their cost structure low. In HCLTech's recent earnings call, chief executive C. Vijaykumar pointed out that the company had almost doubled its fresher hiring between 2020-21 and 2022-23.
Hiring changes impact productivity (revenue per employee). In FY23, it fell in each quarter for all the four companies.
In FY24, productivity started picking up, but still lags pre-pandemic (FY19) levels, as Mint reported last week. One reason for the recovery in productivity for all four companies in FY24 was higher utilization rates (share of staff engaged in active projects).
For Infosys, utilization grew to 82% in the latest fourth quarter from 76.9% a year earlier. For Wipro, utilization (without trainees) rose to 86.9% from 81.7%.
However, utilization rates get saturated after a point. IT firms allocate more people in projects than they bill to provide an assurance for clients. Thus, they need to have bench strength to readily deploy into upcoming projects. All four companies are hoping to get more of them in the coming quarters.
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