Wage Hikes: The Biggest Challenge For Indian IT Companies
Why pressure on margins of IT firms is only likely to increase.
Wage hikes to curb employee churn have been weighing on the profit margins of India's top software services providers even as demand and client spending on technology rise. That's only going to worsen over the next few quarters at least.
For Wipro Ltd. and HCL Technologies Ltd., it's been a bigger problem. The total wage bill comprising employee salary and subcontracting costs jumped for the two companies in the second quarter.
Here's how IT companies have fared on employee costs since the start of the pandemic:
For Wipro, total wage cost—employees and subcontractors—rose to 70.4% of revenue from operations in the September quarter, while for HCL Tech it rose to 68.3%, BloombergQuint's calculations show.
TCS Ltd. and Infosys Ltd. saw these expenses fall since the first quarter of fiscal 2021. And they remained stable in the first two quarters of the ongoing fiscal.
Employee costs as a percentage of revenue rose for Wipro and HCL Tech in the last six quarters.
For Wipro, it increased from 53.8% to 56.54%, while for HCL Tech it rose from 50.95% to 53.3%.
For TCS, however, these costs declined from 57.6% to 56.30%, and for Infosys from 57.49% to 53.18% of the revenue.
Employee costs had declined for all IT companies in the previous fiscal as they delayed lateral hiring during the pandemic and took campus hires on-board. They used benched employees to manage order execution.
But as demand increased in the last three quarters, the attrition rate rose and retention costs increased as the companies had to hikes wages. India's top IT firms have handed out at least two salary hikes in the last nine months to retain talent.
Tight supply of talent also forced companies to subcontract work to third parties to meet demand. Outsourcing cost as a percentage of revenue is the highest for HCL Tech and Wipro. But all IT companies saw an increase in the last year and a half.
Infosys' subcontracting costs rose from 6.9% in the first quarter of FY21 to 10.3% in the second quarter of FY22.
For TCS, it rose from 8% to 8.9% of the revenue during the period.
Higher subcontracting costs underscore uncertainty in demand. That prevented companies from hiring employees, causing a mismatch of talent pool to execute order flows.
That's also reflected in the slow ramp-up of revenues despite IT companies netting big deals in last four quarters.
Infosys has raised campus hiring to 45,000 this year to stem its attrition rate of more than 20%. TCS will hire an additional 35,000 fresh graduates after the company saw its attrition rate cross 11% in the second quarter.
Together, the four IT companies are expected to hire 1.2 lakh employees in the current calendar year.
IT companies expect attrition to persist in the next two-three quarters and expect it to stabilise by the middle of the next calendar year.