What the vacant seats at TCS mean

Mumbai/Bengaluru: Tata Consultancy Services is not filling up many of the roles that are becoming vacant when people leave the firm, contributing to the company ending FY24 with fewer employees than it had at the beginning.

Traditionally, a fall in headcount has been associated with lower earnings for IT companies, and vice-versa. However, TCS brushed aside concerns saying the dip was nothing unusual, especially after an earlier hiring spree. Some industry participants, though, are of the view that this may be a sign of things to come, with AI increasingly replacing employees in big IT services firms.

Mumbai-based TCS, India’s biggest IT services company and largest private-sector employer, ended FY24 with 601,546 employees, against 614,795 in the year ended March 2023, a fall of 13,249 heads. This is a first for the company since it went public in 2004.

A TCS executive, speaking on condition of anonymity after it declared its earnings last week, said the company would continue to hire people and it would be wrong to infer a structural change in its business model. “Please understand that there is always some recalibration companies have to do after the record hiring we did in the last few years,” the executive said.

The executive is referring to the spurt in hiring by the TCS in FY22, which saw a net addition of 103,546 employees that fiscal. Another 22,600 people were added in FY23.

In FY24, headcount declined over three consecutive quarters through March 2024, but the company’s top executive defended the dips, saying headcount ups and downs are a product of utilization and not revenue.

“We continue to drive efficiencies, we continue to look at where we can better deploy our associates and where we can take the trainees ahead of time. So, maybe in, let’s say, Q1 or Q2 we take trainees or headcount may go up, but the training process may take about six months or nine months before we start deploying them,” K. Krithivasan, managing director and chief executive officer (CEO) of TCS said in response to a Mint query during the results last Friday. “So, to say that this quarter, the headcount went up so the immediate next quarter the revenue should go (up), may not be a correlation.”

“The era of revenue-up coinciding with an increase in headcount is fading out,” said the head of a Bengaluru-based recruitment firm that hires for TCS, on condition of anonymity. “There will be further dips in manpower going ahead across IT services once more AI-driven processes come in. The need will be only for more specialized skills.”

TCS is already looking for specialists on an urgent basis, to the extent that it recently started offering vendors ₹40,000 per candidate over and above their regular fees if they manage to make senior candidates join in less than 30 days. The urgency to get experienced employees in programs like Flutter, Windchill, Workday, and SAP, among others, is a sign that markets are opening up for the IT services firm.

However, despite the advances being made by AI, the $250-billion Indian IT sector continues to heavily rely on engineers taking on coding work for banks, manufacturing companies, and retail giants, among others, which is why hiring assumes significance in determining an IT company’s health.

On Friday, when it declared its fourth-quarter and full-year earnings, TCS’s management said the company would growth faster in the current fiscal year (FY25) than the 4.1% dollar revenue growth it achieved in the previous fiscal. However, the management was still a tad shy from acknowledging if growth will be in double-digits. TCS, which does not give forward-looking guidance, has maintained that it aspires to clock a double-digit growth.

“Headcount declined sequentially for the third straight quarter and finished down in FY24 vs FY23, which all else equal is not encouraging for demand inflection,” Keith Bachman, an analyst with BMO Capital Markets, wrote in a note dated 12 April. “Net, we think the spend environment could improve in 2HCY24, though we believe there remains uncertainty on the slope of improvement especially given ongoing macro uncertainty including US interest rates.”

At the heart of this scepticism is the fact that two-thirds of TCS’s business grew less than its headline 4.1% growth last fiscal. North America, which accounted for 51% of its $29.1 billion in revenue, fell 2.3% from FY23, as customers continued to hold back from spending more on IT-related outsourcing work for a clutch of reasons. And its biggest business vertical—banking, financial services and insurance (BFSI), reported a de-growth of 1.3% and accounted for 32% of total revenue in FY24, compared to 33.3% in FY23.

“TCS’s results show that the IT services sector will take a few more quarters to show clarity on what their clients really want,” said the head of another recruitment firm that hires for TCS and other IT firms. “Many US-based ones are waiting for their elections to get over. In India, those who are exiting are not being retained, and backfill attrition is down by 70%.” Backfill attrition is when an exiting employee is replaced by another either from within the firm or outside.

“(TCS) plans to hire 40,000 freshers for the year, which is indicative of a demand recovery,” Apurva Prasad, Amit Chandra and Vinesh Vala, analysts at HDFC Securities wrote in a note dated 13 April, a day after the company released its results. “Training intensity has increased, reflected in higher learning hours despite a headcount dip and lower fresher intake in FY24. Attrition (LTM or last twelve months) dipped further to 12.5% in IT services as the replenishment was lower than the gross intake.”