TCS rejects price cuts in pursuit of new clients
lion in operating profit was more than TCS’S $367.2 million.
TCS said it continues to work towards operating between a 26% and 28% profitability band, even as Infosys in April last year dropped its profit outlook to between 22% and 24% for the current fiscal.
Many analysts say this was on account of the company looking to drop prices for its services, although Infosys maintains that the reason for the lowering of profitability is to plough back the savings to invest in digital technologies and also cover expenses related to hiring more locals in the US and pay more to hire the brightest engineers.
The underlying reason for declining profitability at Infosys and other large IT firms, including Wipro Ltd and HCL Technologies Ltd, is that there is pricing pressure on commoditized deals or traditional information technology work, which still account for over three-fourths of total revenues.
These firms maintain they earn more money on work related to digital, the fuzzy umbrella term that each firm uses to call revenue generated from areas generally classified as social, mobile, analytics, cloud computing, and Internet of Things.
However, digital still brings less than a third of the overall business.
Worryingly for investors of Infosys, some analysts say the company’s profitability will remain challenged in the current quarter and will be unchanged in the fiscal beginning April.
“We project margins to be roughly flat in FY20,” Keith Bachman, an analyst with BMO Capital Markets, wrote in a note dated 11 January.
“We think margins will be lower sequentially in 4Q, as INFY (Infosys) will have a negative impact from INR appreciation, and has continued expenses in localization, reskilling, and compensation changes to help lower attrition. Also, we think there is a ramp time for new deals, which we expect will also weigh on margins in 4Q. In FY20, we project 23.0% operating margins, as we think investments will stabilize though FX will be a headwind,” wrote Bachman.