(Updates with Mumbai employment figure in 10th paragraph.)
Oct. 19 (Bloomberg) -- Tata Consultancy Services Ltd., Asia’s biggest employer of software developers, will shift hiring to low-cost cities in India as it struggles to maintain profitability amid spiraling labor costs.
The company, based in Mumbai, is building campuses and adding workers in cities including Ahmedabad, Pune, Bhubaneswar, Nagpur, Indore and Cochin, Chief Financial Officer S. Mahalingam said in an interview. The company’s shares plunged the most in more than two years yesterday after earnings missed analysts’ estimates amid rising costs.
Employee costs at Tata Consultancy, which spent $2.8 billion on salaries in the year ending March, rose 27 percent last quarter exceeding the 15 percent increase in profit. While expanding in cheaper cities will help reduce costs, lack of infrastructure and quality of employees may create new challenges, according to Vihang Naik, an analyst at MF Global Sify Securities Pvt.
“The biggest campuses that we’re building now are in Pune and Ahmedabad,” Mahalingam said in Mumbai yesterday. “At the same time time we are putting pressure on the system, the government to upgrade the infrastructure in these places.”
Tata Consultancy gained 1.3 percent to 1,046.7 rupees at 12:30 p.m. in Mumbai after plunging 7.7 percent yesterday after profit missed analysts’ estimates by 3 percent. The company’s operating margin narrowed by 1 percentage point in the three months ended Sept. 30.
‘Hardly Have a Choice’
India’s inflation exceeded 9 percent for a 10th straight month in September, reducing room for the central bank to pause its record interest rate increases and maintaining pressure on wages. Salaries in India are set to rise the most in the Asia- Pacific region this year, according to an Aon Hewitt LLC survey released on March 8.
Wages are likely to rise an average 12.9 percent in 2011, compared with 11.7 percent last year, according to the survey of 531 organizations from 18 primary industry sectors in December and January. Chinese salaries may rise 9 percent, while those in the Philippines 7 percent, Aon Hewitt said.
Tata Consultancy and other Indian software developers “hardly have a choice in terms of this expansion,” Naik said. “It has to happen in smaller towns.”
Second-tier cities like Jaipur and Ahmedabad have operating costs that are 20 percent to 30 percent lower than established technology hubs like Bangalore, according to a May report from Everest Group, a Dallas-based firm that advises companies on outsourcing strategies.
Tata Consultancy, which has 20,000 workers and 17 offices in Mumbai, will increase its workforce in Ahmedabad to 12,000 from 2,000, and add to its “small presence” in Pune with a new facility that can hold 17,000 workers, Mahalingam said. The centers will offer a range of services including business process outsourcing and call centers, software and application development and infrastructure management, he said.
The challenges of expanding to small cities include poor infrastructure, unreliable power supply, poor English proficiency and a lower-quality labor pool, according to Everest Group.
“Infrastructure will be a very major challenge,” Mahalingam said. “If I have a choice of only two airlines to go to Bhubaneswar from Delhi, I think that’s going to put a phenomenal amount of pressure.”
Tata Consultancy will only expand into tier-two cities that have adequate engineering graduates, Mahalingam said.
“We have chosen places where there is talent,” he said. “We are not going to any place where we’re not in an active program of recruitment from colleges.”
Tata Consultancy is on track to add a gross 60,000 workers in the year ending March 2012, Chief Executive Officer N. Chandrasekaran said.
--Editors: Arijit Ghosh, Abhay Singh
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