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Aggressive hiring hits staff utilisation in IT

More pressure on IT firms’ operating margin, which has been under stress owing to cross currency headwind, wage cost and travel expenses

Utilisation level at Infosys falls to lowest at 77.6% in Q1
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Utilisation level at Infosys falls to lowest at 77.6% in Q1

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Margin Pressure

- Utilisation level at Infosys falls to lowest at 77.6% in Q1

- Wipro's gross utilization level at 72.7%

- Mindtree's utilization level declines to 81.2% per cent

Bengaluru: Indian IT services companies are witnessing a fall in employee utilization levels that can lead to managing high attrition and support operating margin profile, which has been under pressure owing to cross currency headwind, wage cost and travel expenses. According to company officials, higher fresher induction is one of those initiatives not only to contain attrition, but also to right sizing of employee pyramid. Though a greater number of freshers lead to fall in utilization levels, it also creates a pool of reserved employees to encash new demand. Moreover, high bench strength- the term used for reserved employees- reduces wage cost pressure as IT firms don't chase new hires with multiple offers.

"Earlier, increase in utilization level used to support operating margin. However, things are different now as we have seen rise in subcontracting cost across the industry despite large scale hiring of employees. Therefore, it is difficult to draw a correlation between utilization level and operating margin at this point of time," V Balakrishnan, Chairman, Exfinity Ventures & former CFO of Infosys, told Bizz Buzz.

In the first quarter of FY23, Infosys saw its utilisation level falling to 77.6 per cent, which is the lowest since FY17-18. Similarly, Wipro's gross utilization level was at 72.7 per cent, which was also at multi-year low. Among mid-tier companies, Mindtree's utilization level fell to 81.2 per cent in Q1 of FY23 as compared to 83.2 per cent reported a year ago.

Fall in utilization level was majorly driven by aggressive hiring of freshers over the last one-and-a-half years. Market leader Tata Consultancy Services (TCS) hired 100,000 fresh engineering graduates in FY22 and recently said that it remained on track to onboard another 40,000 freshers this fiscal year. On an aggregate basis, top four Indian IT services companies- TCS, Infosys, Wipro and HCL Technologies, added 227,000 fresh engineering graduates in the last financial year. Hiring among mid-tier companies also remained robust during this period.

In the quarter ended June, most IT companies also onboarded freshers on a priority basis. For instance, Wipro onboarded 10,000 fresh engineering graduates in the first quarter and is planning to hire 30,000 freshers in FY23.

Company officials also said that higher onboarding of freshers would create a decent bench strength and reduce their dependency on subcontractors.

"As the hiring catches up automatically, you will see the stabilization of subcon costs, which as percentage of revenue, you are seeing this increase every quarter. While we have seen it flattening out and over the future, as we got our recruitments done and we are able to hire fresher, we should see benefits coming out of that," Chief Financial Officer at Infosys, Nilanjan Roy has said during analyst call post Q1 earnings.

Subcontracting cost- cost which IT firms incur due to outsourcing projects to third parties- is seen a sharp rise in the last one year. Most large and mid-tier firms have been reporting 10-11 per cent of their total cost coming from subcontracting as compared to 5-6 per cent in the pre-pandemic period.

Earlier, increase in utilization level used to support operating margin. However, things are different now as we have seen rise in subcontracting cost across the industry despite large scale hiring of employees. Therefore, it is difficult to draw a correlation between utilization level and operating margin at this point of time

- V Balakrishnan, Chairman, Exfinity Ventures, and former CFO of Infosys

Debasis Mohapatra
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