The long-term prospects of the IT sector are still bright | Photo Credit: SRIRAM MA
IT companies have to devise ways to check employee attrition to protect margins
Leading information technology companies continued to benefit from growing digital adoption in the fourth quarter of FY22 with most companies reporting robust revenue growth. While year-on-year revenue growth of TCS, Infosys and HCL Technologies was in mid-teens in the last quarter of 2021-22, it was between 28 and 37 per cent for Wipro, Mindtree and L&T Infotech. Most companies have also given strong revenue guidance for the next fiscal indicating that they are expecting demand to sustain in the coming quarters. While the companies have a reason to be upbeat about revenue visibility over the long term, their near-term outlook may be a trifle optimistic given the disruption to global growth caused by the Russia-Ukraine conflict. With the IMF revising its global growth projection for 2022 and 2023 lower by 0.8 and 0.2 percentage points from the January projections, it is obvious that global IT spends will also similarly contract. Further, with most of the large IT players deriving over half of their revenue from the US, they need to recognise the risks to demand posed by the Federal Reserve’s aggressive monetary tightening and growing inflation.
Another factor that is threatening to dampen the profitability of Indian IT players is the increasing pressure on operating margins caused by heavy employee attrition. Shortage in talent caused by the pandemic coupled with resistance to returning to office is pushing up salary cost as well as leading to greater churn in IT workforce. EBIT margin of TCS declined 1.8 percentage points in the March quarter of 2022 when compared with the corresponding quarter in the previous year. The contraction was 3 percentage points for Infosys, 2.6 percentage points in HCL Technologies and 4 percentage points in Wipro. This is largely due to attrition doubling for all companies in the March 2022 quarter compared to the previous year. Further, with employees beginning to travel and return to offices, other employee-related overheads are also beginning to increase. Bringing down costs by employing freshers or setting up offices in tier-II and tier-III cities can be a short-term solution but it increases training cost and reduces operational efficiency. IT companies need to work towards improving employee loyalty through higher employee engagement, defining clear career paths, timely recognition and rewards and offering hybrid work-place model — flexibility to work either from office or from home — so that employees are motivated to stay on. They can also consider using issuing ESOPs with slightly longer vesting period to retain employees.
While short-term risks remain, Indian IT companies are on a sound long-term growth trajectory with clients trying to transform every part of their business through technology, data and artificial intelligence. This will ensure a sound demand environment for Indian firms and once they address the issues related to employee attrition, their profitability will also be reasonably protected. The companies need to invest more in research and development to enhance patent-backed offerings. According to a recent NASSCOM report, Indian companies have filed more than 82,000 patents in the country and around 21 per cent of these patents related to software applications. Such patent filings need to increase so that Indian firms increase their product portfolio to command a premium while competing with global peers.
Published on May 01, 2022