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.