Infosys scales down variable pay to protect margins

The traditionally cash rich Indian IT sector is facing a crunch of sorts. They are still sitting on piles of cash but in the last few quarters, the employee costs and travel costs have shot through the roof. The employee attrition for most of the large IT companies is well above 18% and that is putting additional pressure on the employee costs. Most IT companies have taken measure to cut costs so as to protect margins of the future. Infosys has scaled back the average variable pay-out of employees in the current year to about 70%.

To be fair, in an industry that is so manpower and skill intensive, the manpower costs are always a challenge. It is just that in the last few months, the squeeze has become just too acute leading to margin squeeze. This is jot just about Infosys, Other players like TCS, Wipro, Tech Mahindra and HCL Tech are also taking measures to either reduce or to postpone variable pay to align their costs more with the growth in revenues. Wipro held back the variable pay to employees while TCS delayed payment of variable pay to select employees. 

While Infosys has not spoke about it through an official statement, and for obvious reasons, the reports are that Infosys had reduced variable pay-out for Q1FY23 to about 70% of the original sum. For the June 2022 quarter, Infosys had reported profit growth of just 3.2% despite a 16% growth in revenues guidance. Margin guidance at about 21% for Infosys is around 400 bps lower compared to the last few quarters The major reasons for the margin squeeze were higher employee benefit expenses, sub-contracting costs and travel expenses.

In the IT business, the huge mismatch between the supply and demand for manpower is also resulting in a spike in attrition levels. That is also indirectly hitting employee costs and putting pressure on margins. The lower variable pay is an attempt to curtail the employee pay-outs and to protect margins. However, Infosys has clarified that it is looking at multiple cost levers and manpower costs was just one of them. The manpower cost alone impacted the operating margins by 160 bps, while utilization levels also fell in the quarter. 

However, the market appeared to be in panic mode. On Tuesday, the IT index fell by as much as 2.5% over an explicit admission that costs were pinching. Going ahead, the It sector will have to fight margin pressures and also the battle of perception.