Consumer momentum unlikely to derail as IT firms rationalise salary payouts

Consumption-related stocks are unlikely to take a big knock as companies, especially the ones in the information technology (IT) sector, look to rationalise costs over the next few quarters, said analysts, who believe the delay in variable pay payment and bonuses will largely be restricted to the IT sector.

"There has been a disproportionate rise in the employee cost for IT companies that I have not seen in the last 20 years," said G Chokkalingam, founder and chief investment officer at Equinomics Research. The industry, he said, will succeed in rationalising the rising employee cost going ahead as it is a collective effort across large-and mid-sized firms.

“The revenue (in dollar terms) has grown just 3 - 4 per cent in the last few quarters for IT firms, which is hugely disproportionate to the employee salaries being paid by these companies. The IT sector is a part of a larger services industry where human resource is a raw material. For other companies within the services sector, such as telecom and BFSI, human resources is not that big a component of the total cost structure. Hence, this phenomenon of deferring variable pay will not be as percolate to other sectors. Even if it does, the intensity may not be as severe," he said.

Over the last few days, frontline information technology (IT) companies – Infosys, Tata Consultancy Services (TCS) and Wipro – are delaying variable payout to employees, reports suggest. C-suite Level at Wipro, according to reports, will not get any portion of variable pay, while employee grades between freshers to team leaders will get 70 per cent of the total variable pay. A similar action was undertaken by TCS that has delayed the variable pay for senior employees for the first quarter of fiscal 2022-23 (FY23).

An analysis of the quarterly numbers announced by India Inc suggests that the employee cost rose to Rs 3.46 trillion in the recently concluded quarter, a year-on-year (YoY) increase of 13.36 per cent. For IT firms, employee costs grew at a faster clip – up 20.3 per cent YoY to Rs 1.02 trillion in the June 2022 quarter.

More money in the hands of employees meant more spending. The markets, on their part, took note of this development and most consumption-related stocks did well in 2022. In the last six months, the Nifty Consumption index has rallied 12 per cent as compared to the 3 per cent surge in the Nifty50 index, data showed.

Consumption-related sectors, according to A K Prabhakar, head of research at IDBI Capital will continue to do well as the employee cost rationalisation will be restricted to the IT sector only. The delay in variable pay to IT sector employees, he believes, will not be meaningful enough to dent the overall demand in the economy.

“The only concern in my view is that the rural demand is not picking up, which can dampen sentiment a bit. But overall, the consumption story still remains strong in India as the economy picks up. Among the lot, I like Jubilant FoodWorks, Devyani International, Indian Hotels, Mahindra Holiday, Lemon Tree, Trent and Titan Company. HUL, ITC, Britannia, Dabur, Marico should also do well as commodity costs come off and the overall demand remains robust,” Prabhakar said.