Sep 18, 2012|
IT Sector Big 4: 1QFY13 Operating costs analysis
In an earlier article we focused on the Big 4 IT companies (TCS, Infosys, Wipro and HCL), identified the four revenue drivers, and found out which of those were sector versus company specific.
Now, this article focuses on the cost structure of these companies with particular reference to employee costs. We examine 1QFY13 QoQ costs to determine whether the core operating cost components are controllable by the company, or are they uniform across the IT sector?
Operating Costs and its core components:
For the IT services sector, the primary operating cost drivers are:
IT companies are primarily export driven. So, a large portion of their revenues are generated in USD and other foreign currencies. However, most of the operating costs are incurred in Indian rupees.
- Cost of revenue (CoR): This includes employee related costs, fees to external consultants/subcontracting costs, travel costs, facility expenses and depreciation, etc.
- Selling, General and Administrative expenses (SG&A): These primarily comprise of employee costs (non-billable/project related employees), fees to consultants, allocation of depreciation costs, travel, marketing, etc. Basically, these are indirect costs, which are incurred over and above the CoR.
With the rupee depreciation, cost increases as a percentage of revenue could well mask the real situation. Hence, we also focus on the absolute cost increases during the quarter.
The table below shows 1QFY13 numbers related to the above two core operating cost components, with particular reference to cost of employees.
We also looked at 4QFY12 numbers for which relevant results were similar. So, for simplicity we focused our analysis and discussion on 1QFY13 knowing that our conclusions were validated by 4QFY12 numbers.
Table 1: 1QFY13 Big 4 Operating Cost Related Parameters
Note: Click here for quarterly results of the IT sector
|Key Operating Costs Parameters (1QFY13)
|CoR as a % of revenue
|CoR QoQ increase
|CoR Employee cost in as a % of revenue
|CoR QoQ increase in employee costs
|S,G &A as a % of revenue
|S,G&A QoQ increase
|S,G&A Employee cost as a % of revenue
|S,G&A QoQ increase in employee costs
Cost of Revenue (CoR):
As the table above shows, for 1QFY13 TCS showed a QoQ CoR increase of 13.2% against a USD constant currency revenue (CCR) growth of 4%, and a 15% rupee revenue growth. CoR made up 53.8% of revenue.
For Infosys, the QoQ CoR growth was 11.8% against a CCR decline of 0.4%, and a 9% rupee revenue growth. CoR made up 60.4% of revenue.
For Wipro's IT services segment, the QoQ CoR growth was 8.3%, versus a CCR growth of 0.4% and a rupee revenue growth of 9.6%. CoR made up 66% of revenue.
For HCL, we compared 4QFY12 (HCL follows a June year end) with 3QFY12. HCL saw a 9% CoR growth against a CCR growth of 4.6% and a rupee revenue growth of 13.5%.
All these show that CoR as a percentage of revenue and its increase does vary by company.
CoR Employee Costs:
In 1QFY13,TCS CoR employee costs represented 38.3% and it increased by 15.2% QoQ. For Infosys CoR employee costs represented 49% and it increased by 15.2% QoQ.
For Wipro's IT services segment, the corresponding breakup for CoR and SG&A was not available in their annual reports. But for Wipro Ltd. as a whole, employee expenses in 1QFY13 were 43% and it grew 11% QoQ .
HCL too did not report any breakup for CoR and SG&A (HCL follows a June year end).
Further, while TCS announced pay hikes during the quarter, Infosys neither implemented nor did it make any future commitment with respect to pay hikes. For Wipro and HCL, the full effect of pay hikes will be more visible in the coming quarters.
Another interesting point to note over here is that although the increase in employee costs over the quarter was the highest for TCS, employee costs as a percentage of revenues was in the late 30's for TCS, compared to the late 40's for Infosys, and early 40's for Wipro.
These variations by company lead us to infer that CoR employee cost management for project related employees is more of a company specific issue. And even with disproportionate billable employee costs, the companies were basically able to consistently maintain the employee cost structures with respect to their revenues.
Selling, General and Administrative Expenses (SG&A):
In the case of TCS, SG&A comprised of approximately 19% of revenues in 1QFY13. SG&A related employee expenses made up 12.5% of revenues and grew by 10.4% QoQ.
For Infosys, SG&A represented 11.6% of revenues in 1QFY13. SG&A related employee expenses were 5.7% of revenues in 1QFY13 and it grew by 3.2% QoQ.
For Wipro's IT Services segment, SG&A was 12.7% of revenues in 1QFY13 and it grew by 14% QoQ.
Finally, HCL's SG&A made up 15.8% of revenues and grew at 6.1% QoQ.
Overall, TCS seems to present an atypical picture as SG&A ate up nearly 19% of revenues, whereas for Infosys, Wipro and HCL this ratio was in the 12%-16% range.
We note that while HCL was smart enough to restrict the SG&A growth to 6% in 1QFY13, the figure was comparatively larger for Wipro at 14%; Infosys and TCS saw a similar growth of approximately 11%.
SG&A Employee Costs:
A further drill down (within the limits of data availability) reveals that SG&A employee costs were 12.5% and 5.7% of TCS's and Infosys's respective revenues in 1QFY13.
Again, the figures compel us to note that overall SG&A and SG&A employee costs are essentially company and not sector specific drivers.
Effect on operating profit:
Our objective was to examine the two operating cost components - CoR, SG&A and with a particular focus on employee costs to know whether any uniformity with respect to those exists across the Big4. Having done so, to provide a complete picture, the table below shows the impact on the growth of the respective operating profits (revenues less operating costs) of the Big 4.
Table 2: 1QFY13 QoQ Key Operating profit parameters for the Big 4 IT companies
|Sequential increase (in Rs)
|Cost of Revenue
|Employee costs within cost of revenue
The above table clearly shows that different sequential increases with respect to revenue, CoR and S,G&A across the Big4 had different impacts on the respective operating profits: Less than proportionate increases with respect to CoR and S,G&A compared to revenue in case of HCL magnified its operating profit growth by 40%, whereas for Infosys the result was opposite.
Our detailed analysis of operating cost structures leads us to conclude that although the Big4 Indian IT companies offer similar services and operate in same geographies, each of them has control over and manages their operating costs differently. And this naturally has varying effects on their operating profits.
We further conclude that the timeless essence of studying each company closely holds true even when companies are in the same sector.
More Views on News
Aug 2, 2017
A better than expected turnaround in performance results in a change in view.
Jul 27, 2017
Digital services drive growth for Wipro in 1QFY18.
Jul 14, 2017
Infosys starts FY18 on an encouraging note with a stable performance.
Aug 5, 2017
How to get exclusive insider recommendations from Ankit Shah.
Jul 14, 2017
TCS starts FY18 decently despite an adverse currency impact.
More Views on News
Aug 10, 2017
Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.
Aug 8, 2017
'Yes, it looks like a bubble. And, yes, it's like buying a lottery ticket. But there's something happening that has never happened before. It's an evolutionary leap in money itself.'
Aug 8, 2017
Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...
Aug 12, 2017
The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.
Aug 10, 2017
Bitcoin hits an all-time high, is there more upside left?
Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement. LEGAL DISCLAIMER:
Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here
. The performance data quoted represents past performance and does not guarantee future results.SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: firstname.lastname@example.org. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407