India’s technology powerhouses, used to double-digit annual rates of expansion year after year, appear to be dusting off the FMCG playbook to ride out the unusual current spell in top-line stagnation: they are fattening operating margins instead.
Tata Consultancy Services (TCS), Infosys, HCLTech and Wipro are increasing their profitability as the elbowroom to expand revenues appears rather constricted. TCS, the leader of the pack and the only tech company to feature in the list of global top 100 by market capitalisation, sequentially widened its operating margins by 110 basis points to 24.3%.
One basis point is a hundredth of a percentage point.
Infosys, the second-biggest in the business locally, said its margins for the quarter stood at 21.2%, up 40 basis points over the past quarter. Similarly, third largest firm HCLTech’s operating margin for the July-September quarter was 18.5%, compared with 17% the prior quarter and 18% a year earlier.
To be sure, Infosys, HCLTech and Wipro have slashed their revenue guidance for the upcoming quarter and full fiscal amid a freeze on tech spends and delay in decision making. The FMCG industry, often faced with competition and maturity in key micro-markets and product categories, often has to harness the profitability lever to ride out business cycles that often cause volume growth to stagnate.
Experts said that companies are using this downturn to go back to the basics on cost management and are increasing employee productivity to squeeze out better margins without growth.
TCS does not give margin guidance but has said that it is on track to achieve its aspirational margin range of 26-28% over the next few years. Infosys has maintained the margin guidance at 20-22% for the year despite slashing revenue guidance. Similarly, HCLTech has also maintained the 18-19% operating margin guidance for the year through March despite slashing revenue guidance.
Analysts added that companies are likely to successfully manage the necessary short term margin improvements since attrition has fallen and companies are saving on hiring costs. They also have a large bench of employees created over the past few years.
Companies are reducing hiring laterals while continuing to hire freshers. This helps in improving the employee pyramid and the cost structure of IT Services companies, said Kumar Rakesh, analyst, BNP Paribas. “So, although counter intuitive, you will see companies mostly achieving their margin expansion guidelines even if revenue growth remains challenged,” Rakesh added.
With attrition getting under control, companies are in a better position to increase their utilisation rates. “All this can now be managed without risking disruption of projects,” said Rakesh.
TCS operating ‘ margins expanded 110bps sequentially to 24.3%, 30 basis points ahead of JP Morgan estimates as TCS cranked out productivity and utilization from existing staff while pruning sub-cons. “Poor industry growth outlook will keep it defensive and crank this further even as BSNL deal is margin dilutive,” the report said.
“Generally, when we are talking to our customers on cost optimization, why would we not do cost optimization internally? So that was the thinking to run in a lean manner,” chief executive officer C Vijayakumar told ET after the second-quarter earnings.
The IT services majors had reported peak attrition and subcontracting costs around Q1-Q2 of the 2023 fiscal which has reduced significantly since, as per reported numbers.
The companies had hired in huge numbers between FY21-FY22 giving them the necessary runway to build on higher utilisation of talent, said experts. This comes as companies have already indicated travel curbs and that fresher onboarding is likely to be delayed while some like Infosys have written off campus placements as well. Cumulatively, the top four IT majors have shed their headcount by 37,299 over the past two quarters. This compares to an addition of 81,678 during H1 of the 2023 fiscal.
Ravi Menon, research analyst, Macquarie Capital, said that the calendar year 2024 will be challenging but not a full washout year in terms of growth. “The Q2 FY24 has seen profits up YoY by 9% for TCS for example as it improved margins. We expect near-term EPS growth to be led by margin recovery back to pre-Covid levels while we see FY25 return to double-digit growth for the industry,” he added.
