Hiring in IT Services to Remain Low until Demand Improves by End of H1 FY26: ICRA Moderation in demand coupled with the increase in utilization of excess manpower added during FY22-23 exerted pressure on hiring by IT services companies through FY24 and Q1 FY25.

Hiring in the USD 250-billion Indian IT services sector is expected to remain low-key until demand improves in the first half (H1) of FY26, according to the most recent ICRA report release in December.

Moderation in demand coupled with the increase in utilization of excess manpower added during FY22-23 exerted pressure on hiring by IT services companies through FY24 and Q1 FY25. Coupled with an increase in attrition levels, this also led to negative net employee addition for the seven quarters till Q1 FY25 for ICRA's sample set companies. While there has been some recovery in Q2 FY25, ICRA expects hiring to remain low in the near term until the growth momentum picks up by the second half of FY26.

Average dollar revenue per employee for the sample set has largely been stable at around USD 50,000 over FY20-24. However, this metric will show steady improvement if assessed on revenue in rupee terms due to depreciation of the rupee against some key foreign currencies over this period. To rationalize costs, IT services companies are hiring more from tier-II/III cities and also expanding their office footprint in these regions.

The last twelve-month (LTM) attrition rate had peaked at about 23 per cent during Q4 FY22 and Q1 FY23, led by significant hiring and subsequent demand-supply mismatch. However, it sequentially tapered with lower hiring by IT services companies amid moderation in demand in key markets of the US and Europe. The LTM attrition rate for ICRA's sample set companies started stabilizing from Q3 FY24 at about 13 per cent, much lower than the pre-pandemic level of 18 per cent in Q1 FY20.

Lower discretionary technological spending by customers in key markets of the US and Europe, considering an uncertain macroeconomic environment, has led to moderation in demand for Indian IT services companies over the last 6-8 quarters. Higher inflation and interest costs also exerted pressure on clients across key industries, resulting in increasing focus on cost optimization/ business critical projects, and deferment of large discretionary spends.

In line with the trend witnessed in recent years, five leading IT services companies accounted for about 75 per cent of the total net employee additions at the industry level in FY24. However, given moderation in demand outlook, gross hiring by IT companies has remained flattish in recent quarters. In H1 FY25, while Tata Consultancy Services (TCS), Infosys, and Tech Mahindra reported net employee addition of 8,000-11,000 each, HCL and Wipro continued to report negative net addition to their employee base.

As Gen AI makes rapid inroads, all leading IT services companies are upskilling their employees for tech skills as they explore AI-driven business opportunities. This is likely to lead to an overall moderation in fresher hiring, as compared to pre-Covid levels.