TCS re­jects price cuts in pur­suit of new clients

Mint ST - - COR­PO­RATE -

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.

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