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Finance Friday: Infosys rolls back freeze, pay hikes proposed

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If you wanted any more proof that the economic scenario is geared for better days, this one is only going to reassure your hopes.

Infosys Pay Hike

Infosys– the IT bellwether has finally decided to hike pays coming this October. It is notable that Infosys among others had initiated a freeze on pay hikes and promotions in April amidst the Global economy crisis and shirking profits.

According to ET, Infosys has begun the Performance Appraisals and pay hikes are to expected from October. With this, Infosys is clearly signalling that the troublesome days are over as far as the profits are considered. Moreover, the falling rupee is definitely adding to the profit margins of IT export houses and hence the pay hikes may not create a big dent on the projections.

"Yes, we are giving hikes this October. It will happen across the board," the paper quoted Nandita Gurjar, Infosys’ group head for human resources as saying.

The stock markets though have not taken this positive news in their stride. Infosys stock almost dropped to 40 points after the news came out. To a certain extent the negative bias is justified too. Given the scale of operations, Infosys has a sizeable Salaries bill estimated at around 45-46% of sales. Any hike in the salaries is going to pressurise the profit margins.

It is estimated that the impact of the salary hike will roughly translate into 2.4% of the company’s revenue. In rupee basis, the figure is likely to be around 475-500 crore. Now, for the speculation driven market that we are in right now, any move that could dent the profit margins of the company is going to be met with negative bias.

As thumb rule, every 1% rise salary cost hit margin by 50-55 bps

But, for a medium to long perspective the pay hike is only going to boost the company earnings and growth. IT Services sector is human resource intensive. The pay hikes are definitely going to energize the manpower and it would directly transcend into happy employees giving more at work and eventually leading to increasing profits for the company.

The timing of the news in also interesting. With the second quarter results on the anvil, the dent on the earnings owing to the pay hike is not going to reflect until the next quarter. So, Infosys is expected to overcome this short term stock market beating with a healthy second quarter result.

[This Finance Friday post has been written by Ankit Agarwal, an ERP Consultant by profession, a wannabe entrepreneur and stock market stalker by passion]

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