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Indian IT Firms Focus on Improving Utilisation Rates to Boost Margins

 The Indian IT sector is witnessing a trend of companies trying to increase their utilization rates to enhance their margins. Utilization rates, which refer to the percentage of employees working on active projects, had declined significantly in the past few quarters. In this article, we will delve into the reasons behind this decline and what companies are doing to address it.

Declining Utilization Rates in the Indian IT Sector

Infosys, India's second-largest IT firm, reported a gross utilization rate of 76.9% (including trainees) for the March quarter, which was lower than the previous quarter. Excluding trainees, the net utilization rate fell 7 percentage points to 80%, the lowest since the quarter ended March 2015. Wipro, on the other hand, reported a gross utilization rate of 72.8% for the fiscal year 2023, which was the lowest since fiscal 2020. Its net utilization was the lowest in seven years at 81.20%.

According to Nilanjan Roy, CFO at Infosys, there are levers to improve operating margins, and the company's utilization rate at 80% is probably the lowest he has seen. The higher bench (or employees who are not assigned to any project) comes with a double whammy. Therefore, there are opportunities for Infosys to improve the employee pyramid and boost its utilization rate.

Factors Contributing to the Decline

Several top companies, including Infosys and Wipro, had mentioned unplanned project ramp-downs and softening demand during their fourth-quarter results. This could have impacted the utilization levels as well. Other industries like banking, financial services, and manufacturing have also experienced declining revenue growth and hiring trends, leading to a cascading effect on the IT sector.

Dharmender Kapoor, the former CEO at Birlasoft, added that the onboarding of freshers and honoring the previously extended offers has also contributed to lower utilization levels. He also stated that the reaction time was very low this quarter, leading to a hit on utilization.

Strategies to Improve Utilisation Rates

Mid-cap firms like Coforge said they are happy with their current utilization levels, and only those firms struggling with demand generally try to increase the metric. Coforge CEO Sudhir Singh stated that if growth was going to be tepid, then he would turn the dial on utilization. Firms that see demand will need a bench to fulfill that demand. Their utilization rate at 81.5% is where they will likely sustain (in the near term).

Coforge's strategy to improve margins is by winning large deals with a greater offshore component and moderating increments. Going forward, Kapoor predicts that utilization will get better as the hiring outlook has dropped, and it is a two-three quarter phenomenon before revenue growth returns, as it has happened historically in the sector.

Conclusion

The declining utilization rates in the Indian IT sector are a cause for concern. However, companies are actively looking for ways to improve the metric and boost their margins. With the hiring outlook dropping, utilization rates are expected to improve in the coming quarters. It is essential to keep an eye on this metric, as it is critical to the growth of the IT sector in India.

The article was written By

Bharath(Developer)