Indian IT Firms Holding Back Salary Hikes To Protect Margin

Indian IT industry players are considered one of the best companies as far as employee engagement is concerned. The $245 billion strong industry employs more than 50 lakh people with 36 per cent of the employee base being women workers. Hence, it is one of those sectors that are actively promoting diversity and inclusivity in several ways. Large IT firms are not only debt-free but also are sitting on huge cash reserves. Investors usually consider them best bets as far as assured return is concerned. However, some recent developments have surprised industry watchers. According to reports, companies like Infosys, HCLTech, LTIMindtree, L&T Technology Services and the likes are yet to give annual hikes to their employees, which are normally rolled out during April-June or July-September by most domestic IT firms. Except Tata Consultancy Services (TCS), large firms have so far held back annual increments. Such deferment of salary hikes is driven by multiple factors. Firstly, IT industry has been in a low demand environment for last two years, which is creating margin pressure as revenue growth remains tepid.

In this context, IT firms are not keen to roll out salary hikes as they want to protect their margins. Notably, around 60 per cent of all costs constitute of wages in IT firms’ P&L account. So, holding back salary hikes provides a lot of cost saving to IT firms. Secondly, wage hikes have been very good post-pandemic. Due to tight job market and a surge in demand, IT firms had paid even 100 per cent hikes to hire people. Such practices have bloated the cost structure of IT firms. Many companies are stuck with high-cost employees at a time when the new project flow has been declining. Moreover, employee attrition rate has fallen substantially. From around 20 per cent during the post-pandemic period, attrition has now fallen to around 10-12 per cent for most IT companies. This is giving confidence to companies to hold back increments. With the job market remaining tight, the probability of employees quitting also remains low at this point of time.

Therefore, the disgruntlement among employees will not have much impact on operations as there are not enough job opportunities in the market place. In this context, such companies can hold back increments till the second half of the current fiscal year. Many analysts see its impact on margin during the second quarter. “Most companies have deferred wage hikes to Q3 and beyond, which means H2FY25 margins would see headwinds from the wage front as well as furloughs,” brokerage firm Motilal Oswal Financial Services said in a pre-earning note. While margin is likely to see uptick in the second quarter, the second half of FY25 could see the impact of wage hikes if IT firms decide to roll them out in keeping with the times. Meanwhile, any uptick in demand environment can change the scenario fast as IT firms will be compelled to roll out hikes to meet the supply situation.