India's second largest IT services company Infosys has scaled back the average variable pay-out of its employees for the June quarter. The IT company has reduced this to about 70 per cent citing margin squeeze and high employee costs, Press Trust of India (PTI) reported. Sources told the news agency that the company has informed employees about this decision.
Last month, Infosys reported a lower-than-estimated 3 per cent rise in its June quarter net profit amid escalating costs. However, the company raised its full-year revenue growth outlook to 14 to 16 per cent citing strong demand and robust deal pipeline.
The company maintained the margin guidance at 21-23 per cent but made it clear that with the increase in cost environment, it will be at the lower end of the margin outlook. Infosys' operating margins were at about 20 per cent in Q1 FY23.
Course Correction, But In Which Direction?
Infosys is the third Indian IT major to re-evaluate the variable component of its employees’ salary. Recently, Wipro did the same mainly due to pressure on its margins, inefficiency in its talent supply chain and investment in technology. PTI added that Tata Consultancy Services also reportedly delayed quarterly variable compensation payout for some employees by a month.
However TCS has clarified that “Variable pay is either paid in month one or month 2 as per the normal process and there is no delay in this process. 100 per cent variable arrears is being paid for Q1.”
Since the beginning of this year, IT shares have staged a sharp correction on the back of expensive valuation and margin contraction concerns. The IT index on the National Stock Exchange–Nifty IT index–has dropped 24 per cent year-to-date. It is the only sectoral loser among the 15 sector gauges compiled by the National Stock Exchange.
The high demand for IT transformation in the pandemic also led to high attrition in the sector. Infosys' attrition rate jumped to 28.4 per cent in the quarter ended June 2022, up from 13.9 per cent during the same quarter last year. Wipro's attrition rate rose to 23.3 per cent in June quarter compared with 15.5 per cent in the same quarter last year. Tata Consultancy Services, too, saw its attrition rate go up to 19.7 per cent in June quarter.
To stem this loss of talent, companies undertook salary hikes, leading to the margin contraction. At the same time, high attrition has adversely impacted margins of these organisations as they have been coming down consistently and to improve this companies have taken steps to hold back variable pay.
Infosys’ profit before interest depreciation and tax margin also known as operating profit margin declined to 25.67 per cent in June quarter from 29.94 per cent during the same period last year, Wipro's margin fell to 21.43 per cent from 23.63 per cent in the year ago period and TCS' margin declined to 28.20 per cent from 31.68 per cent in the year ago period.
