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indian it companies: IT companies look to boost margins by increasing utilisation levels

Indian IT companies are looking to beef up their margins and are relying heavily on increasing the utilisation rates to achieve this.

Utilisation rates for IT companies mean the percentage of their employees working on active projects. This metric had significantly dropped for them in the past few quarters.

India’s second largest IT firm, Infosys, reported a gross utilisation rate of 76.9% (including trainees) for the March quarter, which was lower than the previous quarter. Excluding trainees (or net utilisation), the rate fell 7 percentage points to 80%, the lowest since the quarter ended March 2015.

Also read | Infosys Q4 Results: PAT rises 8% YoY to Rs 6,128 crore

For Wipro, the gross utilisation for the fiscal year 2023 came in at 72.8%, which was the lowest since fiscal 2020, while the net utilisation was the lowest in seven years at 81.20%.

“You have levers of improving (operating margins). Our utilisation at 80%, which is probably the lowest I have seen. We have other opportunities of improving the (employee) pyramid, because the higher bench (or employees who are not assigned to any project) comes with a double whammy,” said Nilanjan Roy, chief financial officer at Infosys.

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A lot of top companies, including Infosys and Wipro, had called out unplanned project ramp downs and softening demand during the fourth-quarter results. This could have impacted the utilisation levels too.

Also read | Wipro Q4 Results: Profit dips to Rs 3,074 crore

Wipro too acknowledged the scope of improvement in utilisation in its fourth-quarter earnings call.

“It is always dangerous to set a precise target for utilisation because about three-four quarters ago, you should remember we had a quarter where we had a lower operating margin, and the reason we did that is it was a conscious choice because we knew it was an investment for the following quarters. We wanted to develop capacity, including a significant boost of our Next Generation Associates programme, which we have done,” chief executive Thierry Delaporte said.

“One of the primary reasons for this fall is that revenue growth for all companies has gone soft. Secondly, the onboarding of freshers and honouring the previously extended offers continues to happen. This also leads to lower utilisation levels,” said Dharmender Kapoor, former CEO at Birlasoft.

The revenue growth and hiring trends of other industries like banking, financial services and manufacturing have been hurt and that has a “cascading effect” on the IT sector, he added.

“The reaction time was very low this quarter and that’s why they have taken a hit on the utilisation,” Kapoor told ET.

But a few mid-cap firms like Coforge said they are happy at the current utilisation levels and that only those firms that are struggling with demand generally try to increase the metric.

“We still expect to drive robust growth. If I were looking at a scenario where growth was going to tepid, then I will turn the dial on utilisation. Firms that are struggling on the demand side are the ones that will normally try to take utilisation up. Firms that see demand will need a bench to fulfil that demand. Our utilisation at 81.5% is where we will likely sustain (in the near term),” said Coforge CEO Sudhir Singh.

Coforge said winning large deals with a greater offshore component and a slight moderation in terms of increments will be its top margin drivers.

Going forward, the utilisation will “get better” as hiring outlook has dropped and it is a two-three quarter phenomenon before the revenue growth returns as it has happened historically in the sector, Kapoor said.

This is another metric returning to pre-pandemic levels for IT firms as both Infosys and Wipro had hit record levels of utilisation during fiscal 2021, as productivity skyrocketed during the initial work-from-home phase.

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