Three ways TCS, Infosys and other IT giants in India are trying to cut costs — but it’s not going to increase their profitability
- Indian IT giants are scrutinising every aspect of their expenses in order to cut down on costs as business takes a hit during the coronavirus pandemic.
- Wage hikes have been paused, new employees aren’t being onboarded, and it helps that work from home means that travel expenditure is low for the meanwhile.
- The weakening rupee against the US dollar brings in support.
- Cost-cutting measures may help companies tide through the turbulent time, but they won’t help overall margins expand.
All IT majors in India have listed a few ways — no salary hikes, reduced costs like travel and sponsorships, increased work from home — to cut costs. And, the Chief Financial Officers (CFOs) are hoping that a stronger dollar will boost margin when earnings are converted to rupee.
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However, a former Infosys Board Member TV Mohandas Pai believes that all these may, at best, keep the margin intact. “The IT industry will suffer in the near term due to bankruptcies of clients, a decline in spends, and economic contractions,” Pai told Edelweiss.
“Big companies are already making 20 to 25% margins, and both rupee depreciation and productivity improvement are the tools that enable them to maintain margins,” he added.
|Company||Operating Margin Q4|
IT majors have ‘no regret’ capping salaries for the time being
Wipro is considering temporarily putting employees on leave in order to manage costs. Similarly, Infosys CFO Nilanjan Roy, said “We have stopped hiring temporarily, we have also frozen any salary hikes, we have temporarily suspended all promotions — so these, we believe, are no-regret moves,” during the fourth-quarter earnings call.
So, how much does that save? According to the TCS annual report, the average annual increase was 6% in India. And, for the top five IT companies in India the employee costs can range from 30% to as much as 54%.
|Company||Actual employee cost FY20||% of revenue|
|HCL Technologies||₹ 9,916 crore||30.4%|
|TCS||₹ 64,906 crore||49.4%|
|Infosys||₹ 42,434 crore||53.7%|
|TM||₹ 9,282.70 crore||31.8%|
|Wipro||₹ 26,171.80 crore||51.9%|
‘Work from home’ can be a big cost saver
HCL Tech has proposed a 50/50 plan — where only 50% of its employees will need to work from office at any given time — while TCS CEO Rajesh Gopinathan wants only 25% of the employees on any project at any one place, at any one time.
AdvertisementThe rest can work from home even after the lockdown has ended. “This would axe travel and real estate costs by roughly 300 to 400 basis points,” according to Pai. A hundred basis points make for a percent.
However, there are other experts who believe that any increase in productivity seen during the pandemic may only be temporary as other social options are limited. Once the lockdown is lifted and normal activity resumes, the same level of productivity may prove difficult to sustain.
A weaker rupee is good for companies that earn in dollars
Infosys has already gained 2% on the rupee depreciation — which meant a 50 basis points margin benefit — in the fourth quarter with 97% of their billing in foreign currency. HCL technologies also saw a similar benefit on their margins of around 53 basis points. “Foreign exchange movements, particularly the rupee movement is the one that gave us the maximum benefit,” said CFO of HCL Technologies, Prateek Agarwal.
AdvertisementFor TCS, movements in currency exchange rates through the year resulted in a positive impact of 0.1% on the reported revenue — that’s around 10 basis points for the whole year.
These cost-cutting measures are the need of the hour to maintain margins, however, they aren’t going to spurt profitability, according to Pai. IT majors will be happy keeping the profit margin where it is with FY20 being more about sustaining growth rather than boosting profits.
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