IT firms’ margins hit a 3-year low in FY24 on recession risk
NECESSARY EVIL. Investments into generative AI further dampens operating margins
Margins for top Indian IT firms, excluding TCS, hit their lowest in three years during FY24. As economic woes, starting with the war in Ukraine, spelled trouble for western markets like Europe, firms have largely been reporting declining margins.
The risk of recession in fiscal 2024, along with necessary investments into generative AI, further dampened operating margins for top IT firms like HCL Tech, Wipro, and Infosys. Tata Consultancy Services was the only firm to buck that trend in this financial year, reaching back to the historically comfortable range of 26-28 per cent that it enjoyed before the pandemic, in the closing quarter of the 2024 fiscal. However in an interview with businessline, TCS CFO Samir Sheksaria indicated that India’s largest IT firm might not be able to maintain its 26 per cent margin in the first half of FY25.
Prioritising investments into generative AI has been at the forefront for every Indian IT firm but it is coming at a cost, even as IT firms continue to implement cost optimisation measures such as hiring freeze, reduction in subcontractor costs and even layo¤s. Sanchit Vir Gogia, Chief Analyst and Founder of Greyhound Research explained to businessline, “given the macroeconomic uncertainty, business cycles are much behind the investment cycles for IT companies. With technologies like AI and IoT needed for future growth, IT firms have to continue to make these investments, even as digital transformation projects continue to be delayed.” Gogia believes that for the most part, IT firms will not be able to improve margins significantly in the next financial year as well, even though management commentary for the closing quarter of FY24 has posited some optimism for the 2025 fiscal.
TCS BUCKS THE TREND
TCS was the only IT company which was able to buck the trend. TCS started the 2024 fiscal with an operating margin of 23.2 per cent (Q1FY24) posting significant gains each quarter to end at a 26 per cent operating margin in Q4FY24. Infosys started the year with a 20.8 per cent operating margin (Q1FY24) and ended 20.1 per cent in Q4FY24. Wipro was only able to increase its margins by 40 basis points over the course of the year from 16 per cent in Q1FY24 to 16.4 per cent in Q4FY24. HCL Tech — which was indicating recovery in margins in FY24, peaking at an operating margin of 19.8 per cent in the third quarter — was only able to improve its margins by 0.6 per cent between Q1FY24 ando Q4FY24, ending the financial year at an operating margin of 17.6 per cent.