Active Stocks
Mon Mar 18 2024 15:55:53
  1. Tata Steel share price
  2. 149.60 5.69%
  1. Tata Motors share price
  2. 972.20 2.75%
  1. ITC share price
  2. 417.40 -0.51%
  1. State Bank Of India share price
  2. 730.70 -0.18%
  1. ICICI Bank share price
  2. 1,082.00 0.32%
Business News/ Companies / Profits take a back seat for Indian IT firms
BackBack

Profits take a back seat for Indian IT firms

The strategy shift has helped India's five largest IT firms gain a larger slice of the global outsourcing pie

Indian firms, including Infosys, TCS and Wipro, have been able to win more deals mainly because of their ability to execute well on even lower price. Photo: HTPremium
Indian firms, including Infosys, TCS and Wipro, have been able to win more deals mainly because of their ability to execute well on even lower price. Photo: HT

Bengaluru: Indian outsourcing firms seem increasingly willing to forego profit in the short run in order to reap the longer-term benefits of higher market share.

Most of them have seen their profitability take a hit over the last 15 months as they took to offering price discounts to clients while bidding for contracts.

The strategy shift has helped the country’s five largest information technology (IT) companies gain a larger slice of the outsourcing pie, especially from certain global peers, but it has some worried about the Indian companies’ ability to retain margins at a time when they are all facing significant pricing pressure.

“In 2013, we used to find Indian IT firms in 10% of total deals. In 2015, in about 40% of deals we see other (Indian) rivals. What this has meant is that there is tremendous pressure on pricing," Wipro Ltd chief executive officer (CEO) T.K. Kurien said in an interview last week. “Everyone is ready to drop prices."

The comments echoed those of larger rival Infosys Ltd. For the April-June period, pricing declined by 7% from a year earlier, Infosys chief financial officer (CFO) Rajiv Bansal said last week. However, larger rival Tata Consultancy Services Ltd’s (TCS) CEO N. Chandrasekaran said in an interview earlier this month that pricing has remained “stable".

Wipro, like its rivals Infosys and TCS, has significantly improved its share of winning deals, primarily at the expense of International Business Machines Corp. (IBM) and Hewlett-Packard Co., according to data compiled by BNP Paribas and Mint research (see table). Over the years 2012-14, TCS has increased its share of the outsourcing market by 35 basis points to 1.52%. All the four major Indian IT companies including TCS, Infosys, Wipro and HCL Technologies Ltd have improved their share of winning more deals.

A basis point is one-hundredth of a percentage point.

Indian firms have been able to win more deals mainly because of their ability to execute well on even lower prices, some analysts said.

“Companies with credible offshore models and strong digital offerings and execution—which include Accenture and most Indian players—remain global market share gainers on an annual basis," Abhiram Eleswarapu, an analyst with BNP Paribas, wrote in a July note.

One of the levers IT firms used in the past to shore up their profitability was cutting their headcount in client-facing locations (or onsite) and transferring more work to cheaper locations. However, as more IT vendors help their clients have a socially enabled business model or in the areas of mobility and cloud computing or in their overall digital efforts, some believe that IT vendors will have to rely on other measures to retain profitability.

“In digital, a lot of deals are small and the work involves a lot of work being done onsite. So initially, the margin is almost the same as compared to normal outsourcing deals. Only when the deal has reached a certain size can the work be transferred offshore," said Krishnakumar Natarajan, CEO of Mindtree Ltd, a mid-size IT firm that claims to generate about one-third of its $580 million total revenue from the digital space.

“Although cross-currency fluctuations did impact the profitability (last fiscal year), I would believe the investments made in automation by the companies would have largely offset this. So clearly, if we are seeing margins slipping, it is on account of pricing," said a Singapore-based analyst at a foreign brokerage, who declined to be named as he is not authorized to speak with the media.

Since all IT firms continue to increase their investments in automating work, including upgrading business applications software, which until now was done by deploying engineers, and as the operating margins are mostly comparable to their levels in 2013, they are looking to further increase their revenue even if it means sacrificing margins.

Infosys, which reported a 4.5% sequential revenue growth for the April-June period, saw price realization decline by over 200 basis points, making many believe that the management is chasing revenue at the cost of margins. For now, Infosys maintains it expects profitability to be in range of 24-26% for the current fiscal year. Wipro has said increasing revenue remains its priority.

“Our margins have slipped in the last year, but they continue to be within our comfort range. And for now, our focus remains growth even if the margins slip by a few basis points, because we believe if we can get growth, then we can always operate upon other levers to improve our margins," Jatin Dalal, CFO of Wipro, said in an interview last week.

Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!

ABOUT THE AUTHOR
Varun Sood
Varun Sood is a business journalist writing on corporate affairs for the last fifteen years. He also writes a weekly newsletter, TWICH+ on the largest technology services companies. He is based in Bangalore. Varun's first book, Azim Premji: The Man Beyond the Billions, was brought out by HarperCollins in October 2020.
Catch all the Corporate news and Updates on Live Mint. Download The Mint News App to get Daily Market Updates & Live Business News.
More Less
Published: 27 Jul 2015, 12:07 AM IST
Next Story footLogo
Recommended For You
Switch to the Mint app for fast and personalized news - Get App

Chat with MintGenie