TCS & Infosys Diverge on Margin Bands
Both IT firms reported contracting margins in the third quarter as onsite costs rose
its band to from earlier this year Ayan Pramanik & Jochelle Mendonca
Bengaluru: India’s top-two IT companies have diverged on how they target their margin in the face of structural changes to their business. Tata Consultancy Services is holding on to its 26-28% band even as analysts believe it will struggle to reach that target, while Infosys cut its band to 22-24% from 23-25% earlier this year to allow it room to invest in its US talent model.
Indian companies face a growing need to hire in onshore markets, due to a tighter visa regime and the need to execute projects in newer digital segments that require them to work more closely with their customers. Both TCS and Infosys reported contracting margins in the third quarter as onsite costs rose.
Analysts grilled TCS on its margin band, asking if it was wedded to a target that would hamper its ability to grow. The company said only increased competition could cause it to change its target margin band and it was not yet seeing any.
“Our commentary is that we see structural stability in our margin and business model. It could only get impacted by competitive pressure coming from a customer or a competitor or by being displaced by automation,” TCS CEO Rajesh Gopinathan told ET.
“We have more than established that we are at the top of those curves. And in overall competitive terms, we are stronger today than we were in the past.”
TCS had a slew of ways to ensure that its operational execution is kept high. “There are a combination of process, tools, intellectual assets and organisation structure, all of these allow for superior execution,” Gopinathan said.
Unlike its Mumbai-based rival, Infosys cut its margin band in FY19 and has already faced questions about writing of past investments cutting into profits. For the third quarter, Infosys said the margin contraction was a one-off event and attributed it to multiple factors including on-site investments and depreciation in value of assets — Panaya and Skava.
“There are various factors... each Tighter visa Need to company has different operating models,” Jayesh Sanghrajka, interim chief financial officer, told ET. He added that Infosys saw on-site investments “specifically” hitting its margin during third quarter. The firm had invested in beefing up sales teams in the US as well as expanding its local engineering presence.
Apurva Prasad, IT analyst at HDFC Securities, said during the first nine months of this fiscal, both TCS and Infosys have seen a currency depreciation of 7.5% which would have translated to a near 200 basis points impact on margin.
IT Analyst, HDFC Securities
In that context TCS (margin) is up100 bps and Infosys is 80-90 basis points down. So the added impact for Infosys is accelerated investment onsite, that is why you are seeing divergence in trend
“In that context TCS (margin) is up 100 bps and Infosys is 80-90 basis points down. So the added impact for Infosys is accelerated investment onsite, that is why you are seeing divergence in trend,” said Prasad. He believes a positive reflection of the currency depreciation on TCS numbers shows a “superior execution”. Prasad added that the “margin differential between the duo will continue” even as they see commonalities such as increased hiring and subcontracting costs.
Prasad said the base case operating margin (for TCS in the year) could be slightly short of the lower end of the 26-28% band, while for Infosys it would be above the midpoint of the 2224% guided margins.
The Mumbai-headquartered company has kept that target in place for several years.
And analysts point out that the desire to remain the market leader in profitability could be driving the margin target.
“TCS likes being the growth and profit margin leader, that could be a reason it is not cutting the margin band,” Girish Pai, an analyst with Nirmal Bang, said.
regimeexecute projects in newer digital segments that require them to work more closely with customers