Tech Mahindra delays senior employee wage hikes amid profit decline

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Tech Mahindra has delayed wage hikes for a certain senior employee base to the following quarter amid nose-diving profits and EBIT margins reported by the company during its recent earnings conference.

The company's Chief Financial Officer, Rohit Anand, added that wage increments were given out to the majority of the employee base in the first quarter that ended June 30 itself, causing a 1.3 percent decline in the company's EBIT margins this quarter. The EBIT margins fell to 6.8 percent from 11.2 percent in the previous quarter.

"Majority of the wage inflation is already done in Q1. Only for a certain senior proportion of the employee base, it will happen in the following quarter," Anand said during its Q1 results analyst conference.

He further added, "From an increment impact perspective for the quarter, as I mentioned, we did increment for most of the population. The impact was closer to 1.3% in terms of margin, and there is a certain size of the population for whom the increment will happen in Q2. So that's a smaller impact."

Margin improvement levers for FY24

Tech Mahindra reported a washout Q1 performance, missing analyst estimates on all counts. Net profit was down by over 38 percent both YoY and QoQ. Revenue fell by around 4.1 percent QoQ.

Around 200 bps of the 440 bps fall QoQ in EBIT margin was accounted to the bankruptcy filed by a certain customer of the company, while revenue took a hit amid a seasonally slow quarter for the company as Comviva business took a hit.

According to Anand, margin recovery for the upcoming quarters will be driven by subcontracting substitution, improving scale and other productivity benefits.

“If you look at the last three quarters, while growth has been stagnant or down, we've been able to drive a reduction in the subcontracting costs dramatically,” he said.

“Similarly, the other areas also, which I mentioned maybe except a little bit of view on juniorization, which probably needs to be supplemented with growth and the recovery in the second half. The rest can be worked on as purely productivity measures that can help us as we think about margin expansion,” Anand said.

The company had also reported a decline of 4,103 employees in net addition for Q1 on a QoQ basis. On a YoY basis, the total headcount was down by over 9,000 employees.

Not just Tech Mahindra, its peers Infosys, Wipro and HCLTech too have been either delaying or skipping wage hike cycles in FY24 due to tough business environments and macroeconomic growth headwinds.

Infosys has deferred pay hikes for senior management and employees across all levels without communicating the same to them. Senior management usually receives pay hikes in July while employees across levels get it by April.

Wipro is delaying its wage hike cycle to the December quarter. Last fiscal year, hikes were rolled out in the September quarter. Meanwhile, the company will be paying out only 80 percent of the variable pay to the junior employees in Q1, which is linked to the company’s overall performance.

HCLTech entirely skipped its compensation hike review of the senior management level employees, while deferring reviews of the junior and mid-level employees by a quarter.

Among all of these companies, the country’s largest IT services firm Tata Consultancy Services (TCS) became an outlier, having kick-started its promotion cycle, offering 12-15 percent hikes to its exceptional performers effective from April 1.

TCS though has held up the onboarding of over 200 lateral hires with two to 15 years of experience until October citing uncertainty and delays in project commencement.