Mindtree’s Chief Executive Officer Debashis Chatterjee blamed the information technology sector’s problem with cost overruns in the past year to “some irrational behavior” in the market for IT professionals.
The Indian IT sector has seen wages spiral upwards over the past year and a half on account of strong demand for IT professionals and constrained supply at a time when deal pipeline for the sector was at its strongest in years.
Chatterjee in an interaction with Motilal Oswal Financial Services at the brokerage house’s recent investor conference said that the irrational behaviour was down to frequent moves made by employees and large salary hikes.
“While some of this has been on account of low intake over last few years, the industry needs to guard against becoming uncompetitive,” Motilal Oswal Financial said in its notes from the meeting.
The strong job market for IT professionals meant that attrition rates at major IT companies has hit multi-year highs. At Infosys, one of the bellwethers of the sector, annualized attrition rate rose to record high of 28.4 percent in the June quarter suggesting that the company lost one in every four employees over the previous 12 months.
Attrition rate has been in the mid-20 percent range for most IT companies over the past few quarters reflecting the penchant among professionals to chase the next big pay cheque as IT companies looked to meet project demands.
The spurt in wage costs has resulted in massive decline in profitability of IT companies in the previous few quarters. Infosys, for example, saw its consolidated operating margins shrink 140 basis points in the June quarter to 20.1 percent, which is lower than its guided range of 21-23 percent for 2022-23.
However, a recent report by staffing firm Xpheno showed that IT job openings have dropped 23 percent in August on a year-on-year basis.
Speaking on the demand conditions, Mindtree’s CEO iterated that IT services is playing a major role in ‘core’ (revenue generation related) and ‘context’ (activities to support core) activities of business, making it difficult for clients to reduce expenditure.
“With transformation happening in both Core and Context operations, the IT services industry has evolved into a strategic requirement for large Enterprises, which is a key reason for disconnect with macro weakness,” Motilal Oswal Financial said.
Investors have ben concerned that the impending recession in the US due to aggressive interest rate hikes by the US central bank and the ongoing slowdown in Europe due to the continent’s energy crisis could trigger sharp deceleration in growth of Indian IT companies.
That said, Chatterjee highlighted that discussions with clients are now moving towards cost optimization. However, since these optimisations are being driven by technology it has helped avoid cuts to IT spending by clients.
“As long as IT services vendors can help control cost, they can defend growth-related spends,” Motilal Oswal said.Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.