If the Government's current scheme of offering tax benefits to companies in the Software Technology Parks is not extended, the net margins of IT companies are likely to come down to 15-17 per cent by 2009-10. "The Government should extend the STPI scheme for another 10 years, which will expire in 2009." The Nasscom Chairman, Mr Ramalinga Raju, said on the release of a joint report with Crisil.
India's wage inflation could cause operating margins to decline from an average of 26-27 per cent in 2005-06 to 23-25 per cent by 2009-10. The net margins are estimated to decline from an average 19-20 per cent to 16-18 per cent for the same period as per the study.
With regards to the multiplier effects of the IT-ITES sector, it is estimated that every one rupee spent by the sector on domestically sourced goods and services translates into a total output of about Rs 2 in the economy. This could be through spending by the firm through capital expenditure or operational expenses as well as consumption by the professionals employed in the sector. On the employment front, every one new job in the industry creates four additional jobs in the rest of the economy. The report suggests measures that companies could implement to combat inflation. Despite continuing wage inflation, with operational practices such as changing the manpower pyramid, increasing employee utilisation rates and increasing the billing rates, companies could offset the margin pressures, states the report.
The study estimates that better employee utilisation rates, which is the ratio of the number of billable employees to the total employees, would enable companies to compensate the effect of wage inflation to some extent. At the current level, one per cent point increase in the employee utilisation rate would translate into 0.5 per cent increase in net margins.
While the billing rate continues to be stable over the last two-three years except for the last two-three quarters that have witnessed a surge, the report estimates that the average billing rates of Indian IT companies would increase by 125-150 basis points over four years. This would be mainly due to the increasing share of high-end services as well as an increase in the bargaining power of domestic companies as they grow in size and become more dominant in the global market. Crisil states that at present a one per cent point increase in the billing rate translates into 0.6 per cent point increase in net margins.
The report finds that with one per cent increase in the share of the employees with income less than five lakh per annum of the total employees would translate into a 0.8 per cent increase in net margins for IT companies.