Revenue per employee increases for IT services, masks underlying challenges
Revenue per employee or RPH is an important parameter in the industry as it is considered to be a proxy for pricing trends.
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 2025 (1Q25), said a report by HSBC Securities and Capital Markets.
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.
The report points out that Infosys led the large-tier companies with a 9 per cent increase in RPH, while mid-tier companies like Persistent Systems (PSYS), KPIT, and Mphasis (MPHL) reported strong RPH growth of 14 per cent, 8-9 per cent, and 8-9 per cent, respectively.
“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 trends.
The report also added that the RPH increase has come at the cost of margins. For instance, Persistent Systems’ RPH has gone up due to the ramp-up in large deal wins, but it is also margin dilutive. For Q1 FY25, the company’s Ebit margins were at 14 per cent, down from 14.5 per cent in the preceding quarter.
Going ahead, the report says that the companies will need to focus on pushing pricing as all the operating metrics 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 the companies; with this backdrop, we expect companies to push harder for COLA increases (cost of living adjustment). 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
