The Hindu Business Line : Profitability of services cos getting dented?

IS competition whittling down profitability in the Indian IT services industry? Sustained pressure on billing rates; declines in revenue per employee and profits per employee; and increasing staff costs as a percentage of revenues seem to indicate it.

In the last four quarters, top Indian software service companies have seen a bit of a slump in operating profit (or earnings before interest, tax, depreciation and amortisation) per employee.

Interestingly, revenues per employee have grown for smaller companies, while the big ones have shown a slump on that front too, as seen from the table.

What this means is that these companies need more and more manpower to generate the same profit. As operating profit per employee dips, it could suggest a drop in realisation.

It could also indicate that the return on net worth for offshore projects could be lower compared to onsite efforts. (Return on net worth here indicates profits as a proportion to amount invested.)

Industry sources, however, disagree that dark clouds loom in the horizon. They suggest that published numbers do not convey an accurate picture. They prefer the use of man-months utilised rather than the number of employees at the end of a particular period for calculations.

The sources say, "Using end-of-period manpower strength is not representative of the man-months in the quarter."

However, all software companies do not disclose man-months utilised. End-of-period manpower strength also matters, for costs incurred towards unutilised employees bring down profits. Most companies are in the silent period preceding the announcement of results for the quarter ending September 30, 2005 and hence, are unwilling to comment.

But a source in a Top-5 software services company clarifies that using per capita revenues would normalise the increase in people over a period of time.

Infosys has shown per capita revenue of $6513 (or Rs 2.80 lakh) for the quarter ended June 2005. Interestingly, it was $6556 for June 2004. This reflects per monthly figures as opposed to the quarterly figures one arrives at when dividing revenue by number of employees at the end of the period. Its return on net worth over 12 months as at June 2005 was 41.45 per cent (39.59 per cent in June 2004), while return on invested capital for the same period was 86.75 per cent (86.96 per cent in June 2004).

Simultaneously, staff costs to revenue ratios have also been increasing between the June quarters. (Here, staff costs include salaries, staff welfare and pension costs for software development, sales and administrative staff.)

For Infosys, it rose from 48.7 per cent to 49.9 per cent between June 2004 and June 2005.

For Wipro Ltd, the figures were 40.4 per cent and 43.6 per cent, while Satyam saw the figures rising from 56.4 per cent to 60.4 per cent in June 2005.

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