News & Analysis

Indian IT Could Face Margin Pressures

In spite of decent margins reported as part of their Q3 results, market experts feel that Indian IT companies may have to shift focus to sustain this growth

India’s top IT services companies reported good sequential margin growth in the third quarter with prospects of good margins in the quarters ahead. However, market experts believe that the IT industry could face margin pressures over the next twelve months given that the global economic scenario could put pressure on pricing. 

Market watchers believe that the top-four IT services companies may be missing the wood for the trees while expecting good margin growth in the future quarters, merely on the grounds of lower attrition rates that considerably contained staff costs. In fact, most of them expect very low headroom for further margin growth in 2023 and possibly early 2024. 

There is also an opinion gaining ground among experts that companies need to focus on improving utilization and automation to enhance realization in the near term. Some even point to the recent announcement by Microsoft CEO Satya Nadella while the company laid off its staff in favor of AI-powered functions. 


Throwing people at problems may not help

While existing deals may not add to the unit margins, new ones around intelligent automation may bring in better returns, they said adding that this could be that IT companies may actually have to add more deals and not necessarily more resources in order to make the most of the current global economic scenario. 

Already some are calling it the moment in time when the paradigm shifts from throwing people at problems to creating innovative solutions that costs money initially but gets evened out due to a consistently delivered return on investments over the years. Does this mean that deals being chased by global giants such as EY, Capgemini and Accenture would be par for the course? 


Are more consulting engagements the answer?

Readers would recall that these companies have been playing around in the transformational space with a robust consulting element over the past several years. Would it make sense for the Indian IT companies such as TCS, Infosys, Wipro and HCL to chase the same business at this juncture in time? 

Some experts respond with a strong affirmative answer. “If these Indian IT companies can see the writing on the wall, they need to decouple tech-enabled consulting from their regular delivery and execution business. Of course, this should have been the case several years ago, but the current market offers them a second chance,” says a Hyderabad-based market consultant. 

Given that most Indian IT services companies work on lower margins than their global peers is another reason for making this move. What’s more the time is ripe as recession could easily put paid to any margin growth witnessed in recent times as these came through an increased pricing power. 

It may also be worth noting here that many of the traditional customers of Indian IT majors may not be in a position to leverage the power of offshoring as they are now. Instead they would gladly accept automation solutions at higher price points, given that the returns would spread over considerably longer time durations. 


How did the last quarter go on margins?

In the last quarter, TCS reported a 50 basis point expansion in operating margins to 24.5% which was led by higher efficiencies and rupee depreciation. The company is expecting margins to range between 26 to 28% over the long term, in spite of it falling by 50 basis points when taken at an year-on-year level due to low staff utilization. 

Coming to Infosys, the numbers were frown-worthy as quarterly margins dropped 200 basis points and ruled flat at 21.5%. In fact, even this decline would have been steeper but for the 40 basis point bump led by rupee depreciations. The company aims to end FY23 with an operating margin outlook of between 21 to 22 percent. 

While HCL Tech’s operating margins were up 160 basis points at 19.6%, in the case of Wipro it grew by 120 basis points sequentially to 16.3%. Both companies reported support from recessionary tailwinds and enhanced internal efficiencies for their performance on the margins front during the third quarter. 

Both companies believe that automation and managing the employee structure would be critical components of sustaining margin growth over the next few quarters with Wipro specifically suggesting that they would invest heavily on delivery excellence. 

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