Bengaluru: India’s top IT services companies have finally managed to get a handle on temporary staff costs that had soared in the wake of the pandemic outbreak. At Tata Consultancy Services Ltd, Infosys Ltd, HCL Technologies Ltd, and Wipro Ltd, sub-contractor expenses as a percentage of revenue in the December quarter dipped to below or near levels that prevailed before the outbreak.
At TCS, HCL Technologies, and Wipro, sub-contractor expenses accounted for 6.14%, 13.12%, and 11.61% of revenue in the third quarter, falling below 7.75%, 13.4%, and 14.49% they reported in the January-March period of 2020. At Infosys, these expenses were a tad higher at 7.89% at the end of December, against 7.32% in the March quarter of FY20.
Spending less on temporary workers is one big lever to improve profitability for IT companies, given that salaries account for 60–65% of their expenses, with sub-contracting costs alone accounting for 6–13% of total expenses.
In the December quarter, TCS’s operating margin came in at 25%, against 25.1% in the fourth quarter of FY20. HCL, Infosys and Wipro clocked operating margins of 19.8%, 20.5%, and 16%, respectively, against 20.9%, 21.2%, and 17.6% respectively in the March quarter of FY20.
Emails sent to Infosys, TCS, HCL Tech, and Wipro remained unanswered till press time.
Sub-contractor costs primarily refer to costs of outsourcing work to outside contract staff. As the pandemic lockdowns fuelled demand for software work, sub-contracting costs peaked in the June quarter of FY20. Many companies struggled to hire sufficient numbers, including fresh graduates and experienced executives. Since then, as demand softened, IT services firms have needed few temporary engineers, allowing them to trim these expenses. The decline in sub-contractor costs signal better profitability for these companies in the days ahead.
“Demand for IT services was on the lower side and because of this, IT companies had to deploy fewer people on-site for project completion,” said Omkar Tanksale, equity research analyst at Axis Securities. “Expect sub-contractor costs to increase by 2–4% of revenue and reach pre-covid levels for all the companies in the next 6–9 months when deal wins ramp up,” said Tanksale.
The decline in sub-contractor costs comes even as staff strength declines at these companies. The IT services firms could end the current financial year with a lower headcount than at the start of the fiscal year, a first in over a quarter of a century.
“When overall hiring has been low, it has impacted on-road or sub-contractor hiring as well,” said Rituparna Chakraborty, co-founder of staffing firm TeamLease. “Hiring was mellow because of low demand for IT services and various automation innovations to drive profitability,” said Chakraborty, adding that the coming two quarters will not be much different regarding sub-contractor hiring.