Productivity of IT employees on rise even as firms apply brakes on hiring

The country's ten biggest listed IT companies that are part of the Nifty IT Index earned net sales of Rs 42.3 lakh per employee on average in FY24

With fewer workers, information-technology (IT) companies have improved their employee productivity and earnings.

 

India’s top listed IT companies reported a sharp rise in worker productivity as measured by revenue per employee in the last two years after they put brakes on fresh hiring and rationalised their staff base.

 

The country’s 10 biggest listed IT companies that are part of the Nifty IT index had net sales of an average of Rs 42.3 lakh per employee in FY24, up 9.2 per cent year-on-year (Y-o-Y) from Rs 38.7 lakh in FY23 and a four-year low of Rs 34.9 lakh in FY22.

 

This grew further to Rs 43.3 lakh per employee in H1FY25 on an annualised basis.

 

“Nearly 90 per cent of the rise in revenue per employee in the past 12-18 months came from a headcount decline and the rest from new deals in Gen AI and the IT transformation segment,” said Gaurav Vasu, founder and chief executive officer, UnearthInsight, a research and cognitive intelligence platform for the tech sector.

 

In contrast, the industry had reported a Y-o-Y decline in revenue per employee for two consecutive years in FY21 and FY22 due to a mismatch between revenue growth and an expansion in their employee base.

 

The industry headcount, or employee base, was down 3.9 per cent Y-o-Y in FY24, declining further by 0.4 per cent Y-o-Y in the first half of FY25. This was the first fall in nearly two decades.  

 

The employee base of the top 10 IT companies shrank to around 1.71 million at the end of March this year from a record high of around 1.78 million at the end of March 2023.

 

The headcount increased to around 1.736 million at the end of September this year but was down from 1.743 million at the end of September 2023.  

 

Vasu said the era of big hiring by IT companies was over for now.

 

“The headcount may not shrink from current levels but the companies will hire fewer people than in the past with specific skills sets such as in artificial intelligence.”

 

In comparison, combined net sales of the IT companies were up 4.9 per cent Y-o-Y to around Rs 7.24 trillion in FY24 from around Rs 6.9 trillion in FY23. They were up 5 per cent Y-o-Y to around Rs 3.76 trillion in H1FY25 from around Rs 3.58 trillion in H1FY24.

 

Relatively fast growth in revenues had a positive effect on industry margins and earnings but the companies would require improvement in employee productivity because their average employee cost continues to grow faster than revenue per employee.

 

 The cost per employee was up 12.2 per cent Y-o-Y to Rs 24.8 lakh (on an annualised basis) in H1FY25, growing faster than revenue per employee.

 

The industry’s earnings before interest, tax, depreciation, and amortisation, or operating margins, were up 40 basis points to 24 per cent of revenues in H1FY25 from a record low of 23.6 per cent in FY24.

 

The combined net profits of these companies were up 9.8 per cent Y-o-Y to Rs 58,441 crore in H1FY25 from Rs 53,208 crore a year ago.

 

Growth came on the back of 4.6 per cent Y-o-Y growth in earnings in FY24.

 

Analysts expect the industry’s margins to remain under pressure in the near to mid-term.

 

“Most operating metrics — e.g. utilisation, offshore mix — are at peak levels, so as growth improves margin pressure is likely to increase next year. Overall, we expect margins to remain at 2024 levels. Rupee weakness is a key upside risk to margins and earnings per share,” Yogesh Aggarwal, Prateek Maheshwari and Sagar Desai of HSBC Global Research in their recent report on the Indian IT industry.

 

Analysts say the industry will continue to “repair’ its cost structure as it tries to grow in the era of artificial intelligence.

 

“Large deals are abundant in the market. However, these would involve upfront costs, which would impact margins. Companies are leveraging a benign supply-side situation to optimise employee pyramid and realigning cost base to maintain profitability while driving growth,” write analysts at Kotak Institutional Equity.