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Infosys’ (NYSE:INFY) first quarter results were in line with expectations for the most part and the outlook also looks solid. However, the Indian outsourcing firm is wrestling with a 25 percent spike in employee attrition—the highest mark since 2004, analysts say.

The turnover figures are always worth tracking for Indian outsourcing firms. These companies are moving upstream to more “transformational” deals including business process outsourcing and consulting. Meanwhile, these companies are in growth mode and a high attrition rate becomes a bit of a distraction.

First, the numbers. Infosys reported fiscal first quarter earnings of 57 cents a share on revenue of $1.36 billion. Wall Street was looking for earnings of 56 cents a share on revenue of $1.4 billion. The company said its second quarter revenue will be $1.41 billion to $1.43 billion with earnings of 59 cents to 60 cents a share. Wall Street estimates: earnings of 60 cents a share on revenue of $1.38 billion.

Overall, Infosys’ quarter looked good. Executives were a bit cautious about Europe, but noted they weren’t seeing any major hiccups. The company, however, underestimated the surge in India’s economy and competition for workers.

Those stats tell the tale. Infosys raised wages and incentives and hired 8,859 workers in the June quarter. The rub: The company added a net 1,000 workers. This equation can be worrisome. Infosys has to bring on new workers and train them. Bottom line: These workers aren’t productive out of the gate and hurt profit margins. For customers, there are also worries about project continuity—especially for these high-end projects. In the fiscal second quarter, Infosys is planning to hire 14,000 employees.

T.V. Mohandas Pai, director of HR at Infosys, said the first quarter turnover rate is coming back down. About 950 employees left for higher education. However, the rate of attrition for BPO employees is about 35 percent.

Pai added:

You are seeing the result of suppressed demand both sides of the equation, suppressed demand because people did not hire in the last two years. They shut their bench and when demand came back they had to madly scramble for work, for people. And on other side, many people for the last two years did not take jobs. So I think it’s the perfect storm where we’ve had a higher attrition. But that attrition has tapered off. In June it’s come down. You have to take all the factors. And in June the impact of the salary hike is being felt.

The company now projects it will hire 36,000 employees in the fiscal year, up from its previous target of 30,000, to account for attrition and growth.

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Source: Infosys Wrestles With India IT Worker Turnover