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Home / Companies / News /  TCS’s wage bill to surpass India’s pensions bill for armed force veterans

TCS’s wage bill to surpass India’s pensions bill for armed force veterans

At the end of 30 June 2020, TCS had 4,43,676 employees. Today, TCS has a workforce of 6,06,331, an expansion of headcount by 1,62,655 in eight quarters. (Photo: Mint)

  • Managing this won’t be easy

Like most businesses, the technology services industry was thrown into a tailspin during the global financial crisis of 2008. Then, all IT services companies, save for two, slowed down on hiring.

Like most businesses, the technology services industry was thrown into a tailspin during the global financial crisis of 2008. Then, all IT services companies, save for two, slowed down on hiring.

But Natarajan Chandrasekaran and Francisco D’Souza took contrarian bets. Tata Consultancy Services Ltd and Cognizant Technology Solutions Corp. almost doubled their hiring pace in the year ended 2009.

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But Natarajan Chandrasekaran and Francisco D’Souza took contrarian bets. Tata Consultancy Services Ltd and Cognizant Technology Solutions Corp. almost doubled their hiring pace in the year ended 2009.

Both companies were rewarded well. This first-mover advantage set up TCS and Cognizant nicely when the economy recovered. Beginning January 2011, both companies continued to add over a billion dollars in incremental revenue, year after year.

In February 2017, Chandrasekaran, who took over as chairman at Tata Sons, was succeeded by Rajesh Gopinathan while two years later, D’Souza passed the baton to Brian Humphries at Cognizant.

In the last three years, Cognizant’s performance continues to be below par, to put it mildly, while Gopinathan in the last five years has steered TCS well.

The covid-19 pandemic brought business to a halt in early 2020. Once again, companies put a pause on hiring.

But this soon changed.

The twin engineers of digitization and cloud migration made businesses, globally, spend more on technology, helping IT services companies emerge as big beneficiaries. Surplus work required more hands. Understandably, technology services companies again emerged as the biggest job creators in the last two years.

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Sample this: At the end of 30 June 2020, TCS had 4,43,676 employees. Today, TCS has a workforce of 6,06,331, an expansion of headcount by 1,62,655 in eight quarters.

Now companies once again find themselves at crossroads as fears of an impending recession in the US have made investors and analysts antsy. A slowdown will make companies — from banks to retailers — re-look at their technology budgets, eventually hitting the growth of outsourcing firms like TCS.

To be sure, TCS says there is no immediate worry for now. But it is a given that IT services firms will be among the last to be impacted. Against this backdrop, a moot point to ask is if TCS (and its peers) over anticipated growth and hired a tad aggressively.

View Full Image
The infographic shows that at TCS, staff costs witnessed a 4.04% compounded quarterly growth rate and a 4.08% compounded revenue growth in the last two years.
Click on the image to enlarge

Until now, a breakneck growth has helped hide the surging staff expenses. But a possible slowdown will make it challenging as the share of employee costs as a percentage of revenue will surge, effectively eating into profitability. During the April-June period, TCS’s profitability shrivelled, as the operating margin declined by 190 basis points sequentially to 23.1%, the lowest. Employee expenses were to be blamed. Employee costs as a percentage of revenue were 57.48%, about the same as when TCS reported a sequential decline in business in April-June 2020 when the world was wrought by the pandemic.

For Gopinathan, steering TCS only gets more gruelling. Not only because he has to manage a strong growth for a gargantuan beast: TCS ended with 1,91,754 crore ($25.7 billion) in revenue last year. But he also has to manage the ballooning employee costs. TCS’s employee costs totalled 1,07,554 crore last year.

In the April-June quarter, staff expenses were 30,327 crore. This implies that TCS’s salary bill will top 1,20,000 crore this year.

Put simply. TCS’s wage bill for its over 600,000 employees will be more than what India will pay in pensions ( 1,19,696 crore) to the 2.6 million veterans of the armed forces this year.

Finally, his performance will have a bearing on parent Tata Sons. Since TCS went public in August 2004, it has returned 1,67,786 crore ($21 billion at today’s exchange rate), including 27,469.8 crore last year, in dividends and share buybacks to Tata Sons.

TCS shares are down 17% since the start of the year, which is still better than all homegrown IT firms. But a healthy return on equity, a measure to understand how a company is performing for shareholders, of 41.5% at the end of the June quarter (TCS’s ROE was 50.5% versus 29.1% at Infosys Ltd last year) offers a cushion.

Navigating through difficult times is a test of good leadership. Gopinathan surely does not have room for error.

ABOUT THE AUTHOR

Varun Sood

Varun Sood is a business journalist writing on corporate affairs for the last fifteen years. He also writes a weekly newsletter, TWICH+ on the largest technology services companies. He is based in Bangalore. Varun's first book, Azim Premji: The Man Beyond the Billions, was brought out by HarperCollins in October 2020.
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