Home / News / How variable pay cuts could impact Indian IT companies

India’s IT industry has been in the news recently for re-evaluating employee cost. For e.g., the bonus cuts announced by Wipro and Infosys, setting aside of anniversary wage revision for laterals at TCS, and layoffs at HCL Tech (300 employees on the Microsoft project). The company have been trying to improve cost efficiency by reducing annual hikes, variable payouts.

“This modus operandi is a marked shift from the past operating margin defense strategies, which were anchored on operational efficiency, pricing improvement, and employee pyramid correction. It is still up for debate whether this strategic change is in response to either falling demand momentum or easing off of supply and attrition," said brokerage and research firm Elara Capital in a note on the Indian IT companies

“The variable pay cut holds the potential to lend material margin support. As per our scenario analysis, variable pay cut can translate into an operating margin support of 220 bp to 400 bp for Infosys and Wipro. Employee expense is the largest cost head for India’s tech firms in the range of 44-62% of revenue; consequently, employee compensation tweaks translate into material operating margin impact," the note stated.

The Nifty IT Index is down 30% CY22 YTD on revenue growth, led by a weak macroeconomic narrative. Even as these concerns are yet to hit top line of India’s IT services firms (likely FY24 phenomenon; June 2022 results had no impact, and Elara expects September to see continued growth momentum), investors have started to consider the possibility of operating margin, and thereby EPS surprise and the brokerage house sees less probability in the near term.

Consensus already factors in operating margin improvement and consensus EPS downgrade cycle set in motion by economic concerns in the West has more legs, in the brokerage's view. In the past, when EPS surprise was led by better operating margin management, investor returns were suboptimal (for instance, over FY16-17 when Tata Consultancy Services or TCS surprised the Street with higher EPS on better margin management), it added.

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