India’s IT services firms tighten their wage belts. But are they getting fitter?

Unperturbed, IT services companies are replacing their middle and senior executives with junior employees and investing in upskilling them—which accounts for 5-7% of employee costs.

Human resources executives at these firms caution that the US election, the West Asian conflict, and the upcoming holiday season in key overseas markets will mean fewer recruitments in the next few months.

Wages swallow up a large share of the revenues of India’s IT services companies, which even keep a number of employees on standby to be deployed on new projects. But in the current prolonged IT slowdown, companies have been forced to let go of employees not on a project—the surest sign of distress in the sector.

While the lower employee costs will help improve margins, it signals that the situation may not immediately improve.

Three of India’s top IT services firms—Tata Consultancy Services Ltd, Infosys Ltd,and HCL Technologies Ltd—saw a decline in employee costs as a share of revenue in the financial second quarter, shows a Mint analysis of company results.

Wipro Ltd stood out as the exception, showing a marginal increase in wage costs to 60.4% of revenue in the September quarter, from 60.2% in the April-June period. With that, Wipro maintained its position as the company with the highest wage burden among India’s top four IT services companies—not including the US-headquartered Cognizant Technology Solutions Corp. that has a majority of its employees in India.

HCLTech and TCS recorded the most significant decreases in the second quarter. HCLTech’s wage cost as a share of revenue dropped to 57.2% in the second quarter from 58.5% in the preceding three months. TCS’s wage cost dropped to 57% from 58.2%.

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Infosys boasts the lowest wage burden among the top four—its employee costs relative to revenue declined to 52.6% in July-September from 53.2% in the first quarter.

“Senior executives with 10 years of work experience are getting replaced by two-three junior executives with 3-5 years of work experience," said Neeti Sharma, chief executive officer at TeamLease Digital. “The hiring progress is slow and firms are awaiting the US election result to see how the job market will fare."

Future of IT hiring: not so great

The US is the most significant market for Indian IT services companies and plays a crucial role in their hiring decisions. Sharma said that while the headcount at some of the IT services firms has increased, the companies are bringing in low-cost talent.

While TCS added a net 5,726 employees in the second quarter, Infosys had 2,456 employees joining it. HCLTech registered a net reduction of 780 employees, and Wipro, 502.

Attrition rates, which measure employee departures over 12 months, increased in the second quarter. 

While HCLTech’s attrition rate recorded a slight uptick from 12.8% in the first quarter to 12.9% in July-September, Wipro’s inched up from 14.1% to 14.5%. TCS’s attrition rate jumped from 12.3% to 12.9% and Infosys’s from 12.1% to 12.7%.

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“The marginal uptick in attrition is on two grounds," said Guruprasad Srinivasan, executive director and chief executive of recruitment firm Quess Corp.—one, IT services companies continue to lose employees even as global capability centres continue to hire; and two, they are not trying to retain exiting employees.

“The wage increase, promotion and incentive cycles have been absorbed in Q1 (April-June) and Q2 (July-September), and going ahead the IT services firms will remain muted on the hiring front as we still don’t see increased quantum of mandates coming up," he added.

TCS gave double-digit percentage wage hikes to its top performers effective 1 April, and 4.5-7% salary increases for most of its other employees. Wipro rolled out salary increases of 4-8% from 1 September, and HCLTech handed out 7% hikes starting October, with up to 12-15% for top performers. Infosys is expected to roll out its salary increases in January and April.

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Shedding flab after the covid binge

India’s IT services sector, which slammed the brakes on hiring over the last year and a half after guzzling talent to make up for the covid years, has kept a stringent check on costs.

But lower demand for IT services from Fortune 500 clients caused the $254-billion Indian software services industry to grow at its slowest clip of 3.8% in the year ended March.

For the latest September quarter, Infosys reported the fastest revenue growth among its peers—up 3.8% from the June quarter. HCLTech, TCS, and Wipro reported sequential revenue growth of 2.4%, 2.2%, and 1%, respectively.

“The (chief financial officers) have to trim the flab and one will not see much change in the employee costs going ahead," said Aditya Narayan Mishra, managing director and CEO of recruitment firm CIEL HR.

“That costs have remained stable despite an uptick in attrition is proof of continuous efforts of rightsizing, cost optimisation, and refreshing the talent pool, keeping a tight leash on the cost versus billing."

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