Moonlighting reflects the sign of Recession

It is a fact that most of the IT companies into hardware, software and services had made significant profits during the Covid days, with the rapid shift towards digitalisation. The last two years proved to be a big boon for the Indian IT sector. After two years of bumper profits and mind-boggling salary hikes, in the IT sector, are now bracing for a slowdown as the IT industry was dependent on the US and European markets, it was very concerning to see recessionary winds.

Giants like TCS, Infosys and Wipro rely predominantly on the US and European markets, which contribute to 80-90% of their revenues. Concerns of a recession in the US and Europe – the major markets for Indian IT giants has forced Indian IT companies to remain cautious going forward.

Experts say, the December quarter could prove to be the ‘inflection point’ as far as wages and attrition rates are concerned. Lower revenue compels businesses to cut back on staff, which leads to higher unemployment.

The US market contributes anywhere between 40 – 78% of the revenues earned by Indian IT companies. Tata Consultancy Services, Infosys, Wipro, HCL Technologies, and Tech Mahindra are the top five firms which have more than a 50% exposure to it.

A weakening macro environment may translate into lower IT spends and slower growth for Indian IT companies. Banks, including Citigroup, Deloitte and PNC Financial Services, previously predicted a slowdown in 2023, but recent forecasts say a recession could occur in 2022 or earlier in 2023 than formerly expected.

Indian IT majors are serving thousands of global companies. The advantage of India’s service companies, offered lower-cost back-office IT operations, but in recent years these firms have also moved up the value chain into more strategic areas such as cloud migration, business analytics, process automation, artificial intelligence, machine learning, the Internet of things, and other forms of “digital transformation” agenda.

With the current economic slowdown in the US, is already showing signs of spill-over in the Big Tech revenues – Amazon Web Services, Microsoft Azure and Google Cloud, the world’s top cloud platforms, reported a 7% decline in revenue. Google has suspended hiring new employees and reportedly told some existing employees to "shape up or ship out" if expectations are not met.

Now, with talks of recession in the US and Europe gaining momentum, these IT companies are already under stress. Experts believe that a potential slowdown could have a positive effect on spit-balling wage costs and attrition. With this the concept of Moonlighting has come into force to remove the employees.

The companies had reduced their margin guidance at the start of FY23, but we believe continued pressure due to elevated attrition levels is likely to result in margins dropping near the lower end of guidance, says a report by ICICI Securities.

The Indian economy is not fully dependent on the US and Europe economies. Going forward, Indian IT firms don't face US recession challenges in the short to medium term due to their pipeline being full. Whereas, IT firms are not expressing significant concerns about a possible recession.

Sources say the hiring is impacted with nearly 30% in the large IT companies. Instead, it will be critical for IT firms to balance between the revenue and the margin impact.