Tech Mahindra drives utilisation through lower headcount in FY18

The revenues in the financial year grew 5.6 per cent to Rs 307.73 billion, while EBIDTA grew 12.6 per cent, with EBIDTA margins touching 15.3 per cent

Tech Mahindra, India’s fifth-largest IT services company, has utilised its workforce to the maximum in FY18, not just by reducing headcount but also by improving employee utilisation levels and focusing on more need-based hiring. 

Over the past year, Tech Mahindra reduced its total headcount (software plus BPO business) by 4,886. The most noticeable difference in headcount is in the software arm which shed size by 9,966 employees. In FY17, the Pune-headquartered company had added 10,278 software professionals to its workforce while the overall workforce increased by 12,261.

These changes came in a year when the organisation was riddled with allegations of forced layoffs and the group chairman Anand Mahindra issued a public apology on Twitter after one such ‘layoff” audio clip went viral online. 

Tech Mahindra announced 35.1 per cent growth in its annual profit in FY18 on year on year basis to Rs 38 billion. The revenues in the fiscal grew 5.6 per cent to Rs 307.73 billion while earnings before interest, tax, depreciation and amortization (EBIDTA) grew 12.6 per cent over the year with EBIDTA margins touching 15.3 per cent.

However, on the business front, the reduced headcount has helped the company improve utilisation by 70 basis points from Q417 to Q418 at an all time high of 84 per cent. Trainee utilisation has been reduced to zero at the same time as skilled trainees are being absorbed into projects rapidly. During this period, attrition on last twelve months (LTM) basis has only increased from 17 per cent to 18 per cent.

In FY18, other IT peers namely- Tata Consultancy Services (TCS), Infosys, Wipro, and HCL Technologies - made net additions of 13,972 employees (taking into consideration the number of people exited in the year), compared to 59,427 in 2016-17. Others witnessed comparatively moderate growth while Wipro shed headcount by 1,654 employees.

“Earlier, revenue (growth) was proportional to manpower but today the nature of the business will be cyclical when it comes to manpower. It doesn’t mean that jobs are not being created. If we are doing more digital transformation deals, then the headcount will vary,” said CEO & MD, CP Gurnani post the Q4 results.

While he did not give a projection on headcount, he said the manpower requirement would continue tapering as system operations move from initial development stage to more stable phases. The management has however said that fresher hiring will continue.

“With trainee bench still at zero, we see further sustainable margin improvement only from realisation gains or secular factors like Rupee depreciation. Realization improved 14.2 per cent YoY, led by HCI (at an estimated billing rate$127/hour, at a 285 per cent premium to TechM’s realization at $32.9/hour as on 4QFY17, prior to HCI integration),” said Ravi Menon, research Analyst, Elara Capital in a note.

He also noted that employee costs (excluding subcontracting) were up 3.8 per cent YoY despite the 12.1 per cent YoY decline in software employee headcount.

Interestingly, the company reported an 8 per cent increase in subcontracting costs during the year. The onsite revenue share grew to 67 per cent in Q4 FY18 up from 64.3 per cent a year ago period largely due to a greater number of digital projects concentrated onsite.

“TechM is confident of improvement in EBIT margin in FY19. Along with Rupee tailwind, it targets to utilize levers including automation, offshoring, productivity gains and optimisation of employee pyramid. We forecast EBIT margin to improve by ~100bps YoY to 12.8 per cent in FY20E,” noted Urmil Shah of IDBI Capital in a report.

Last year, the company doled out wage hikes only for employees with up to 6 years of experience. In FY19, the company is expected to face some headwinds in the form of phased wage hikes to employees over the first two quarters but is also expected to balance these with increased automation and an optimal mix of offshoring, outsourcing and near-shoring this year.

Company 

Net Headcount addition in FY17

Net Headcount addition in FY18

TCS

33380

7775

Infosys

6320

3743

Wipro

8650

-1654

Tech Mahindra

12261

-4886

HCL Technologies

11077

4108

Data: Companies

• Software headcount reduces by close to 10,000, overall headcount drops 4,886

• Only Wipro and Tech Mahindra in top-5 witnessed drop in headcount while other  peers saw moderate headcount growth