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India IT Services
Hitting the engineering campuses with a vengeance;
fresher salaries happily remain unchanged
• Typically entering into a new calendar year, over three-quarter of Indian IT'
companies' campus (fresher) hiring requirement for the new calendar has
already taken place (CY10 an exception). This year is no different. Faced
with a good demand environment, Tier-1 offshore IT players have hit the
engineering campuses with a vengeance with TCS, Cognizant, Infosys and
Accenture handing out over 1,000 offers per campus. Till now, the practice
of companies hiring over 1,000 students from a single campus was not
common.
• Our tracker suggests that TCS and Cognizant have hired in a big-bang
manner at a few select campuses while Infosys prefers to visit/reach
more campuses with lower number of offers per campus compared to
TCS/Cognizant.
• Accenture is also making its presence felt with over 1,300 offers at Amity
University. We observe that select MNCs such as Accenture and IBM are at
the engineering campuses in a much more significant manner, attesting to
the institutionalization and maturing of their hiring model in India.
• Interestingly, Infosys has reached out to over 1,000 campuses (either directly
or through off-campus/campus connect programs) in making its offers for
CY11. Cognizant, on the other hand, limits its hiring pool to 100-125
engineering colleges (almost seven-eight times fewer than Infosys). In other
words, TCS/Cognizant prefer to concentrate their efforts at fewer
campuses, Infosys has a more extensive reach. This might reflect
relative hiring preferences of the companies (besides hiring slots
assigned to the companies by the campuses).
• Happily, fresher salaries at Rs3.0 to Rs3.25 lakh per year (about USD7,000)
are unchanged from last year. Thus, there seems to be no/little wage
inflation at the entry level and concern on wage inflation is therefore
confined to annual hikes and wages for experienced hires for CY11.
• The pyramid turns favorable in CY11/FY12 which should give about
120-150 bps of margin impact but will this be enough to maintain
margins in FY12? We believe that this may not be enough to completely
neutralize the modest margin pressures in FY12 if pricing does not improve
2-3% on a like-for-like basis (excluding benefit from business mix and nonlinearity). Sales and marketing costs and reinvestment needs of Indian IT
firms should accelerate as they keep up their revenue growth momentum.
Volume growth in FY12 may provide some leverage but we expect margins
to moderate in FY12 (versus FY11) for TCS/Infosys. We do not see view
this as a concern as FY12 revenue growth should be robust (25%+) which
more than offsets the dip in margins.
• TCS (OW) remains our top pick in the sector. Large-cap Indian IT stocks
are unlikely to return much over 10% in CY11 unless revenue growth in
FY12 can top 30% (in USD terms), which we do not factor in.
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