The report said that the companies will need to focus on pushing pricing as all the operating metric are at or near peak.
The Indian IT sector has reported a 6 per cent year-on-year (Y-o-Y) increase in revenue per head (RPH) in the first quarter of financial year 2025 (Q1FY25), according to a report by HSBC Securities and Capital Market research.
While this may seem like a positive trend, a closer examination reveals that the increase in RPH is largely driven by factors such as higher utilisation, pass-through revenues, and sub-contracting ratios, rather than underlying pricing trends.
“However, adjusted for utilisation, the RPH increase is significantly lower, at around 2-3 per cent for Infosys and nearly flat for the sector as a whole. The increase in RPH is largely driven by internal efficiency measures, multi-year mega deal wins, and onsite-heavy projects with pass-through revenues,” stated Yogesh Aggarwal and Prateek Maheshwari of HSBC in their report.
Revenue per employee or RPH is an important parameter in the industry as it is considered to be a proxy for pricing trend.
The report also added that the RPH has come at the price of margins. For instance, Persistent Systems RPH has gone up due to ramp-up in large deal wins, but it is also margin dilutive. For Q1FY25, the company’s EBIT margins were at 14 per cent, down from 14.5 per cent in the preceding quarter.
The report said that the companies will need to focus on pushing pricing as all the operating metric are at or near peak.
With operating metrics at or near peak and demand gradually improving, margin pressure is expected to intensify across companies.
“We expect margin pressure to get intense across companies; with this backdrop, we expect companies to push harder for COLA (cost of living adjustment) increases. We expect this should lead to better billing rates, at least for onsite business. Increase in GenAI penetration in the custom application development business should be margin-accretive as well, though that would probably be a more medium-term trend,” said the report.
First Published: Sep 05 2024 | 5:51 PM IST