Opinion
Techies never had it so good, but not so much for tech firms
Summary
It remains to be seen if companies can recover the costs from customers in the developed markets and if the rupee’s depreciation versus the American Dollar can recoup some of the decline in profitability
Not since the boom of the late 1990s have software engineers been in so much demand. A Mint report on 17 May about Infosys Ltd planning bumper raises and retention bonuses underscores the challenges faced by the industry that is the country’s largest employment generator in the organized sector.
Salaries have been rising for techies in the last two years primarily on account of the changing nature of work for technology services companies, and also because of the ill-timed moves by some if not all of them.
India’s information technology services sector has about three dozen listed companies and thousands of privately-held firms that Nasscom estimates together did $227 billion in business in the year ended March 2022. The five of the largest homegrown technology services firms -- Tata Consultancy Services Ltd, Infosys Ltd, HCL Technologies Ltd, Wipro Ltd and Tech Mahindra Ltd -- together accounted for about 40% of the country’s $178 billion in IT exports last year.
Four years back, in the year ended March 2018, these companies, put together, hired 5,182 employees.
Fast forward to 2022. These five companies alone hired 2,73,377 people. What changed so drastically in four years?
As the world was wrought by the covid-19 pandemic, businesses worldwide increased their spending on technology. The great corporate migration to the cloud was the second structural change. Fortune 500 companies are now spending less on buying servers, and are instead hiring the infrastructure offered by Amazon Web Services or Microsoft Azure, which rent out computing power by the hour.
The IT outsourcing sector sailed through the pandemic storm on the strength of these two changes, and as consequence, technology services companies now need more people conversant in data analytics, cyber security and machine learning tools, instead of merely having proficiency in foundation languages like JavaScript on which computer codes are written.
Now, there is a shortage of this talent pool. So, IT services have been competing to attract and recruit workers in the numbers required. In other words, salaries are rising rapidly because there’s a demand-supply mismatch in the market for skilled engineers. It’s basic economics at work. The market will clear, stabilizing salaries, and bringing to end the stratospheric hikes, when attrition rates decline to pre-covid level, which they should, as per HR managers’ estimates, by the second half of the current financial year.
While this may not sound terribly pleasing to prospective employees in the job market, it will be music to analysts and investors who are concerned about the rising costs in the IT industry. For, the fastest growth in almost a decade that the sector saw last year came at the expense of profitability, primarily because of heightened competition.
Employee costs account for more than half of an IT services company’s total expenses. A decade back, salaries to employees and fees to consultants used to account for 43% of expenses at TCS. Last year, the company’s wage bill was as big as 53% of its total expenses.
Infosys’s operating margin is down from 28.8% at the end of March 2012 to 23% last year, a sharp 580 basis points decline.
The boffins at IT firms remain sanguine that the high wage costs can be recovered by increasing the rate card for their services to clients. But that is easier said than done. Historically, the inability of technology services companies like TCS to pass on these costs to clients explains why these companies trade at a discount (at less than 30 times forward price-earnings) when compared to fast-moving consumer goods (FMCG) giants like, say Hindustan Unilever Ltd, (which trades at more than 60 times earnings).
And so, to keep costs low, IT companies are looking to hire more college graduates. College graduates accounted for a fifth of the nearly six lakh employees at TCS, while they comprise a third of over three lakh employees at Infosys.
Given the Indian IT business model is based on the low-cost employee advantage, what do the rising salary heads imply for its future?
There isn’t cause for alarm as yet. For now, there is no immediate threat to the business model of these technology services companies that put India on the global software map. But a structural change -- the lower profitability -- is a fact. It remains to be seen if companies can recover the costs from customers in the developed markets and if the rupee’s depreciation versus the American Dollar can recoup some of the decline in profitability.
