Why IT Firms Pause Salary Hikes

‘The demand boom is over, leading to a growing mismatch between revenues growth and employee cost.’

IT (information technology) services companies have put the brakes on salary hikes, but it may not be enough to restore their operating margins to the recent highs.

The combined expenses on salaries and wages of listed IT companies such as TCS, Infosys, HCL Tech, and Wipro were up just 9.8 per cent in Q2FY24, growing at the slowest pace in the last 10 quarters and down sharply from the 22.3 per cent year-on-year (Y-o-Y) growth in Q2FY23 and 14.8 per cent Y-o-Y growth in Q1FY24.

But the industry’s salary and wage bill continues to grow faster than its net sales, leading to compression in margins and poor earnings growth.

The industry’s core operating margins (that exclude other income) declined to 22 per cent of net sales in Q2FY24 from 22.4 per cent a year ago and the five-year average of 23.6 per cent of net sales.

The margins have been lower than this on only two other occasions in the last decade.

There was a similar trend in Ebitda (earnings before interest, taxes, depreciation, and amortisation) margins, but the decline was cushioned by a 15 per cent Y-o-Y increase in other income in Q2FY24.

The industry’s Ebitda margin declined to 23.4 per cent of revenues in Q2FY24, down 30 basis points Y-o-Y.

The combined net profits of 15 listed IT services companies in the Business Standard sample were up just 3.5 per cent Y-o-Y in Q2FY24, the industry’s worst showing in the last five quarters.

As a result, the industry’s net profit margins declined to 14.7 per cent of revenues in the second quarter of this financial year from 15.1 per cent a year ago.

These are the lowest quarterly net profit margins in the industry in over a decade with the exception of June 2023 quarter (Q1FY24), when it had declined to 14.6 per cent of revenues.

The industry’s expenses on salaries and wages were equivalent to 57.1 per cent of net sales, on average, up from 55.4 per cent a year ago and nearly 300 basis points higher than five-year average.

The employee expenses to net sales ratio in Q2FY24 was, however, down 20 basis points from a record high of 57.3 per cent in Q1FY23.

Historically, the industry’s employee expenses have generally moved in tandem with growth in net sales, but this salary bill has grown faster than net sales for the ninth consecutive quarter, the longest streak of such a mismatch in the last 10 years.

“Earlier, most IT companies went on a hiring spree. Now, the demand boom is over, leading to a growing mismatch between revenues growth and employee cost,” says Dhananjay Sinha, head research and equity strategy, Systematix Institutional Equity.

Feature Presentation: Ashish Narsale/Rediff.com

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