Infosys Forecasts Profit Margin May Drop to Record Low Amid Rising Wages

Infosys Technologies Ltd. (INFO) forecast higher wages will erode profitability as India’s second-largest software developer grapples with its highest annual rate of employee turnover in at least 13 years.

The operating profit margin will probably drop by 2.9 percentage points this fiscal year after it declined to 29.5 percent last year, Chief Operating Officer S. Dinesh Shibulal said today in Bangalore, where the company is based. That would result in the company’s lowest annual margin since at least 2003, according to data compiled by Bloomberg.

Employee attrition accelerated to 17 percent last year as competitors including Tata Consultancy Services Ltd. (TCS) stepped up hiring efforts. Profits at Indian software exporters will be under pressure as they boost wages to attract talent in the world’s second-fastest growing major economy, analysts said.

“Attrition is going to be stubborn,” said Vihang Naik, an analyst at MF Global-Sify Securities Pvt. “Post recession, the volume growth was sudden, the clamor for resources has been high. Companies had to recruit new employees to fuel their growth. I am a bit skeptical right now on Infosys’s ability to maintain margins.”

Infosys had its biggest intraday plunge in almost two years today after forecasting sales that lagged behind analysts’ estimates and fourth-quarter profit that missed expectations. Earnings will also be damped by a stronger rupee, Shibulal said.
Infosys Vs Tata

Infosys, which had 127,000 employees at the end of December, said attrition rose from 13.4 percent in March 2010. That’s the biggest rate of departures since at least 1998, according to Bloomberg calculation from company annual reports. Hiring of employees and salary raises for existing staff will probably dent margins by 1.1 percentage points, Shibulal said.

In January, Tata Consultancy, India’s biggest software exporter, had reported a 14.4 percent attrition rate in its fiscal third quarter. The company will announce its full-year results next week in Mumbai.

Infosys, which added a net 3,041 employees in the fourth quarter, said the operating margin in the fourth quarter was 29 percent, compared with 30 percent in the third quarter. Salaries are expected to rise by between 10 percent and 12 percent this fiscal year, while for workers outside of India, it may be about 1 percent to 2 percent, Shibulal said.

“Utilization actually came down,” Shibulal said of using the company’s workers. “That is why the impact on margins happened.”