Company update: Infosys (Outperformer) - Rising average age of workforce has margin implications
Our analysis of Infosys’ (INFO) employee age pyramid shows that the share of the company’s mangers/commanders (employees above 40 years) has grown the fastest at 22% yoy in FY18 (27% CAGR over FY11-FY18) versus mere 1% for headcount below the age of 40 (5.8% CAGR). This is leading to rising average age, likely similar for the sector, which, we believe is inflationary and a potential margin headwind over the long term. We think revenue productivity improvement is necessary to offset the changing age mix. While Infosys has delivered on revenue productivity (5%+) improvement in FY18, we still view itas a key monitorable. We maintain our Outperformer rating on Infosys, given the company’s reasonable valuations (15x FY20E) and improving growth trajectory.
Employees 18-25 years of age have de-grown 8% in FY18…: High share of entry level employees is key for the pyramid. Infosys’ total headcount registered 6.6% CAGR over FY11-18 but entry level headcount de-grew at 0.6% CAGR. As a result, the share of entry-level employees fell to 28.2% in FY18 versus 45.8% and 31.2% in FY11 and FY17, respectively. We attribute the slower growth to rising utilisation, attrition, shift towards increasing technology complexity and possibly, rising automation. In FY18, employee count below 25 of years of age stood at 57,475 in FY18 versus 59,897 and 62,489 in FY11 and FY17, respectively.
…Leading to flattening employee pyramid: The ratio of employees under 30 years of age has slid from 80% in FY11 to 60.4% in FY18, effectively flattening the employee pyramid incrementally. The mix of 31-40 year olds stood at 32.4% in FY18 versus 17.6% in FY11 and 30.8% in FY17, without any pricing gains. Additionally, foot soldier (employees below 40) to commander ratio (employees above 40) is now at 13:1 versus 47:1 in FY11 and 16:1 in FY17. The total employee base of above 40 years comprised 7.1% of workforce at 14,590 employees in FY18. Shift towards smaller projects and agile development could have driven the change, but we are unsure of the billability of employees above 40.
Margin implications unless revenue productivity moves up: Increasing average age of employees has clear long-term negative margin implications, unless wage inflation stalls, given lack of commensurate billability and flattening pyramid. While rupee depreciation offsets part of this mix-led wage inflation, revenue productivity and high rate of automation would be crucial to offset the shift in employee mix. Infosys reported healthy revenue productivity gain of 5.1% yoy in FY18, and this trend needs to sustain. We raise our EPS estimates by ~3% to factor a weaker rupee and have a revised TP of Rs1350 (set at 17x FY20E).
Infosys is a global technology services company based in India. Co. provides business consulting, technology, engineering and outsourcing services. Co.'s end-to-end business solutions include: Consulting and Systems Integration - consulting, enterprise solutions, systems integration and advanced technologies; Business IT Services - application development and maintenance, independent validation services, infrastructure management, engineering services comprising product engineering and life cycle solutions and business process management; and Products, business platforms and solutions, including Finacle™, which addresses core banking, mobile banking and e-banking needs of banks worldwide.
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