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Key takeaways from a concall with Mohandas Pai
of Infosys
We held a conference call with T V Mohandas Pai, board member and Director (HR,
Education & Research, Administration) at Infosys to discuss the outlook on attrition and
manpower costs on the IT sector. Following are the key takeaways:
1. Attrition rates may have peaked. Companies are witnessing a declining
trend in attrition, expected to continue until the end of the financial year.
2. Compensation hikes are moderating across the industry. Wage increases
in the next cycle may be between high single digits to early teens.
3. Increased hiring by MNCs is not a cause for concern for domestic companies.
MNCs too are reeling under the pressure of attrition. The wage differential
at MNCs is not very significant at the mid/senior level compared to the
domestic IT companies.
4. An abundant talent supply at the entry level rules out any resource crunch
at the bottom of the pyramid. Infrastructure management and senior-level
positions in Enterprise Solutions are key segments faced with supply-side
pressures at present.
Attrition rates cooling; downward trend expected to last until the end
of the financial year
Signs of attrition rates slowly returning to normal, indicated in 2QFY11 results of
some companies like Infosys, now appear certain as attrition is moderating across
the industry. The downward trend in attrition is expected to continue until the end of
this financial year.
The spike in attrition during the previous quarters was attributed to three factors:
(1) A sudden up-tick in demand caught the industry by surprise, and it did not have
enough bench strength in place to service the demand, and so had to accelerate
hiring;
(2) Employees capitalized on the opportunity to augment their remuneration by
switching organizations for salary hikes, which went missing during the downturn;
and
(3) Fears among employees that the era of high growth may be behind us, due to
which promotion opportunities within the organization would be limited; therefore
opting to switch to other organizations.
But record recent hirings by many companies has resulted in replenishment of the
benches, cushioning any momentum in staff exits that may thwart a company's growth.
As with attrition, trend in compensation too has been moderating. Going forward, wage
hikes next year are likely to be in the range of higher single digits to early teens, with
Infosys indicating that single-digit wage hikes are a possibility in the next cycle.
However, hiring of locals at onsite is expected to increase as large companies look to
increase their offerings in services higher up the value chain. Increased costs of onsite
employees are unlikely to impact margins given the high-margin nature of services for
which numbers will be recruited.
Hiring more locals onsite is a phenomenon driven by: (1) clients' readiness to indulge in
discussions with experts with rich experience in local markets; and (2) scarcity in India
of talent with multi-year experience in designing and architecture of solutions with an
enterprise view, or in a required domain.
As a combined effect of wage hike moderation but larger onsite hiring, staff cost-tosales
ratio is expected to stay unchanged or increase only marginally, going forward.
Strong MNC hiring not a concern; wage differential at the mid, senior
level insignificant
Despite increased hiring by MNCs in India, visible in additions by the likes of Accenture,
Cap Gemini and IBM, the trend does not pose a serious concern for domestic IT companies.
Even MNCs have been reeling under the pressure of high attrition.
While supply at entry level is abundant, wage differentials at middle and senior levels in
MNCs is not very significant when compared with their domestic peers.
Besides, the charm of an MNC appears to be limited given: (1) comparable compensation
structures, (2) limited growth opportunities vis-à-vis their domestic counterparts, and
(3) enough onsite opportunities with domestic firms to lure employees having onsite
aspirations.
Abundant supply at the entry level; challenge greater in specific
segments like Infrastructure Management and Enterprise Solutions
A 20% growth rate in the industry will lead to total demand of ~310,000 employees.
(The requirement for IT engineers will be slightly lesser as part of this figure will comprise
employees joining from fields like MBA and accounts, and some employees will be hired
locally onsite.) Against this, 600,000 engineers are expected to graduate this year from
domestic colleges, quelling fears of a supply crunch at the base of the pyramid.
However, areas that continue to face challenges in fulfilling hiring targets include: (1)
Infrastructure Management Services, and (2) middle/senior level positions in the
Enterprise Solutions segment. The segments have witnessed high growth in demand
over the past few quarters.
IT as an industry continues to be an attractive destination for the potential workforce
as: (1) compensation is higher compared with the average pay-scale in other industries,
and (2) the onsite-offshore model persists, offering onsite opportunities luring young
talent to the sector.
Valuation and view
While there are no apparent indicators of growth cooling off going forward, we believe
upsides in the sector from current levels will be triggered by: (1) clarity on budgets for
the next year, (2) the visible impact of improved pricing, and (3) reduced pressure on
manpower costs, with a slowdown in attrition rates.
We evaluate players in the IT environment on the strengths of (1) discretionary delta,
(2) operating leverage, and (3) the ability to capitalize on the MNC offshoring trend. We
prefer Infosys and HCL Tech among large caps and Mphasis among mid caps.
We prefer Infosys among top-tier companies due to (1) greater discretionary delta
(Consulting + Package Implementation contributed 26% to revenue in 2QFY11); (2)
better operational scope, and (3) expected 19% CAGR earnings growth over FY10-12.
We are positive on HCL Tech due to (1) continued traction in IMS (22% of revenue in
1QFY11), (2) pick-up in lagging segments like Engineering Services (ERS)/Enterprise
Application Services (EAS) (40% of revenue), (3) HCL Tech's large deal prowess in a
returning deals scenario and expected successes in impending contract renegotiations,
and (4) better than peer group EPS CAGR of 31% over FY10-12.
Mphasis is our preferred pick among mid-cap IT comapnies due to (1) increasing volumes
on a strong MNC offshoring trend, (2) expected revenue CAGR of 25% over FY09-11,
ahead of large-cap peers, and (3) potential upside after the stock corrected on
exaggerated fears of recurrence of a pricing cut.
We would be buyers into intermittent disappointments in the sector, as our long-term
outlook towards offshoring is positive.
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