TCS & In­fosys Di­verge on Mar­gin Bands

Both IT firms re­ported con­tract­ing mar­gins in the third quar­ter as on­site costs rose

The Economic Times - - Disruption: Startups & Tech - WHY IN­DIAN FIRMS FACE A GROW­ING NEED TO HIRE IN ON­SHORE MAR­KETS?

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.

APURVA PRASAD

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

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