TCS Rolls Out Salary Hikes, Takes 200-bps Impact on Operating Margin

New Delhi: Tata Consultancy Services (TCS), India’s largest software services exporter, has announced a salary hike despite reports of pay deferrals at competitor Infosys. TCS expects the increase to result in a 200-basis-point impact on its operating margin, which currently stands at 23.2%. However, the company anticipates offsetting this impact through enhanced efficiencies.

TCS has commenced its annual salary increase, effective from April 1st, and has also initiated the promotions cycle as part of its latest compensation review. Exceptional performers have received a raise of 12-15%.

While TCS remains committed to honoring all previously made offers, its focus will be on leveraging the capacity built in the previous year. In contrast, media reports suggest that Infosys has deferred salary hikes, which are typically implemented in the June quarter.

Indian technology companies have been facing challenges due to a deteriorating global macro environment that is impacting demand. In Q1, TCS reported a 12.6% year-on-year (YoY) increase in revenue, amounting to Rs 59,381 crore, and a YoY profit rise of 16.8% to Rs 11,074 crore. The operating margin showed a marginal YoY expansion of 0.1%, reaching 23.2%.

Infosys is set to report its Q1 numbers on July 20th, with expectations of a 0.5% quarter-on-quarter (QoQ) decline in revenue on a constant currency (CC) basis due to cancellations, project ramp-downs, and slower decision cycles. Jefferies anticipates a 20-basis-point QoQ contraction in EBIT margin due to the revenue decline. They also predict that Infosys will revise its FY24 revenue growth guidance to 4-6% YoYcc (year-on-year constant currency), compared to the earlier guidance of 4-7% YoYcc. Analysts will be closely watching for demand commentary and large deal wins in the upcoming report.

In FY23, Infosys granted an average wage hike of 9.9% to its employees in India, surpassing TCS’s range of 6-9% that includes the impact of promotions and event-based compensation increases. According to JM Financial, wage inflation affected all IT services players during FY22-23. Infosys’ higher attrition rate likely contributed to the relatively higher wage hikes, with the need for retention and backfilling positions at a higher cost.

Overall, TCS’s decision to implement a salary hike demonstrates its confidence in its financial position and its ability to navigate the challenges posed by the global macro environment.

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