How variable pay cuts could impact Indian IT companies

India’s IT industry has been in the news recently for re-evaluating employee cost.

For example, the bonus cuts announced by Wipro and Infosys, setting aside of anniversary wage revision for laterals at TCS, and layoffs at HCL Tech.

The company have been trying to improve cost efficiency by reducing annual hikes, variable payouts.

"This modus operandi is a marked shift from the past operating margin  defense strategies, which were anchored on operational efficiency,  pricing improvement, and employee pyramid correction."

"It is still up for debate whether this strategic change is in response  to either falling demand momentum or easing off of supply and  attrition," said brokerage and research firm Elara Capital

As per our scenario analysis, variable pay cut can translate into an  operating margin support of 220 bp to 400 bp for Infosys and Wipro.

The Nifty IT Index is down 30% CY22 YTD on revenue growth, led by a weak macroeconomic narrative.

Even as these concerns are yet to hit top line of India’s IT services  firms, investors have started to consider the possibility of operating margin

Consensus already factors in operating margin improvement and consensus  EPS downgrade cycle set in motion by economic concerns in the West has  more legs, in the brokerage's view.