Like most sectors, the Meltdown Year has not been kind for the Indian IT industry. Even as its profitability came under pressure with the shrinking overseas market, staff costs seemed to have added to its woes. Salary and hiring freeze in the past one year notwithstanding, manpower cost of major Indian IT companies in percentage terms grew at a higher rate between 2005 and 2009 as compared to the sector?s growth in total income and net profit.
Interestingly, the ratio of staff cost to total income at the aggregate level showed a significant increase during 2008-09, against that of 2004-05, going up to 44.17% from 27.43%.
An analysis of 39 major IT companies shows that their staff costs on a compounded rate have been growing faster than other critical elements. The aggregate income of the IT companies grew at a compounded rate of 29.3% from Rs 30,569 crore in 2004-05 to Rs 85,457 crore in 2008-09 while staff costs grew at the rate of 38.2%. This, when the growth in net profit has been lower at 26.9% to touch Rs 11,731 crore during 2008-09, from Rs 4,485 crore during 2004-05.
According to DR Dogra, managing director and CEO, CARE, a leading rating agency, ?With recessionary conditions prevailing globally in the second half of 2008-09, IT companies had tough times maintaining their topline and bottomline growth. But, as human resource is an important asset for the sector, it was crucial to retain talent.?
Now, with the industry bracing for pay hikes during 2009-10, the annual growth of staff costs is expected to further go up as compared to sales and profit growth, Dogra adds.
The country?s largest software company, Tata Consultancy Services (TCS), has witnessed particularly high staff costs. The manpower payout for TCS has grown at a compounded rate of 58.2% during the study period, with its staff-cost-to-total-income ratio jumping from 22.9% in 2004-05 to 51.4% in 2008-09. During the same period, its net earnings grew at 26.5%, much lower than the rate at which the total income and staff expenditure have grown.
Similarly, in the case of Infosys Technologies, staff costs grew by 33%, which are again higher than the growth rate of 31.6% in net income and 32.2% in net profit. However, its staff-cost-to-total-income ratio improved from 45.2% to 47% during 2008-09 even as the total income per employee of the company increased from Rs 21.85 lakh during 2004-05 to Rs 24.62 lakh during 2008-09. Its profit per employee also increased from Rs 5.91 lakh to Rs 6.77 lakh during the fiscal.
In 2008-09, the sector?s growth was affected by factors like increasing margin pressure due to wage inflation and mark-to-market (MTM) losses by a number of companies on their foreign exchange transactions, perhaps due to unhedged exposures, which were hit by the excess volatility in the exchange rates.
The financial crisis in the US also put pressure on the sector, as the banking, financial services and insurance (BFSI) segments that got worst affected by the downturn, have been the largest suppliers of outsourcing business for the industry.