Tech Mahindra drives utilisation through lower headcount in FY18

Software headcount reduces by close to 10,000, overall headcount drops 4886

Tech Mahindra, India's fifth-largest IT services company, which witnessed a reduction in its overall headcount in FY18, pushed for higher utilisation which reached its maximum level during the fiscal.

In FY18, the Pune-headquartered company saw its overall headcount (software plus BPO business) declining by 4886 over the previous fiscal. The most noticeable difference in headcount is in the software arm which shed the size by 9966 employees. In FY17, the Mahindra Group company had added 10,278 software professionals to its workforce while the overall workforce had increased by 12,261.

These changes came in a year when the organization was riddled with allegations of forced layoffs and the group chairman Anand Mahindra had 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) for the year grew 12.6 per cent with EBIDTA margins touching 15.3 per cent.

However, on the business front, the reduced headcount helped the company improve utilisation by 70 basis points to an all-time high of 84 per cent in Q4 of FY18 when compared with the corresponding quarter in FY17. Interestingly, the company’s utilisation including trainees also stood at the same level as trainees were 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 – though saw a moderate headcount grwth, had together added 13,972 employees (taking into consideration the number of people exited in the year) to their workforce, compared to 59,427 in the previous fiscal. Apart from Tech Mahindra, Bengaluru-headquartered Wipro also witnessed a reduction in its headcount by 1654 employees in the fiscal.

“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,” CP Gurnani, CEO & MD of Tech Mahindra said post the company’s 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 realization 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) was up 3.8 per cent YoY despite the 12.1 per cent YoY decline in software employee headcount.

Interestingly, in 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 optimization 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, Tech Mahindra doled out wage hikes only for employees with up to 6 years of experience. In FY19, the company is expected to face some headwinds owing to rolling out of phased wage hikes to employees over the first two quarters. However, the company is expected to mitigate some of these impacts with increased automation and an optimal mix of offshoring, outsourcing and near-shoring.