Wage hikes keep pressure on IT margins

What's Affecting Bottom Line

- Infy offered competitive salary hikes, higher than historical levels, in April

- All Infy staff get wage hikes from July

- Wipro planning to give promotions and salary hikes every quarter to check attrition

- Operating margins will get the benefit of rupee slide

- But cross-currency volatility may eat into some of the gains

Bengaluru: Indian IT companies may not be able to get any significant boost to their operating margin in the second quarter of ongoing financial year as planned wage hikes for staffers are expected to put a lid on any upside.

Amid high employee attrition, many large and mid-tier companies have announced annual wage hikes in April-June quarter, that are likely to be given to employees from July this year. Usually, the second quarter is considered as a seasonally strong quarter due to high demand from clients.

"We have given competitive salary increases for various employees on April. Given the supply tightness and high-prevailing inflation, salary increases across all geo this year are higher than historical levels. The increases vary based on job levels and performance of employees with top performers getting double-digit hikes. Salary hikes for employees are being done effective 1st of July," Salil Parekh, CEO of Infosys said in post-earnings analyst call.

For Infosys, senior level employees will get a wage hike in July. The company, however, said that the impact of these hikes would be far lesser than first quarter. The Bengaluru-headquartered IT firm had seen its operating margin impacted by 1.6 per cent due to salary increases in the first quarter.

Similarly, Wipro is planning to give promotions and salary hikes to its employees every quarter to check attrition. Wipro is the only large IT firm to see a marginal drop in its employee attrition number in the first quarter.

While most large firms have already rolled out a wage hike, many mid-tier IT companies will see the impact of wage hikes on their operating margins in the July-September quarter.

"In Q2, we will have headwinds from wage hikes that are effective July 22, which we will try to offset through a combination of growth and operational efficiencies. As indicated in the prior quarter, our aspiration is to maintain EBIT margin at 18 per cent levels in the medium-term with levers such as growth, better quality of revenues, and operational efficiency gains," said Rajeev Gupta, Chief Financial Officer of L&T Technology Services.

However, operating margins of most companies will get the benefit of rupee slide against dollar though cross-currency volatility may eat into some of the gains. In the first quarter of FY23, most mid-tier IT companies have reported more than 20 per cent employee attrition. For large-tier firms, the story is not very different though management of some companies said that quarterly attrition numbers have started to dip.