Cost pressure pushes IT cos to high margin deals

Bengaluru: IT services companies are focussing on outsourcing contracts that come up with high margin and are sometimes letting go off low-margin deals amid intense pressure on their operating margins.

Sales teams of large and mid-tier IT firms are under pressure to clinch high margin deals in the US and European geographies, sources in the know said.

In the last two quarters of current financial year, most companies faced margin pressure owing to high attrition, rising travel and utility expenses coupled with cross-currency headwinds. The third quarter (October-December) is considered to be a seasonally weak quarter owing to furloughs. Against this backdrop, companies want to protect their margins by bagging high margin deals.

"There are deals in the market. But most firms are looking at bagging high margin deals to support operating margin which is under pressure for last two quarters," said Pareekh Jain, an outsourcing advisor & founder of Pareekh Consulting.

Meanwhile, sources in the know said sales teams are under constant pressure to deliver such deals as management is not keen to take low margin contracts.

"Deal win TCV (total contract value) remained flattish quarter-on-quarter (QoQ), but was healthy YoY for most companies. Infosys and Mindtree reported strong YoY growth in deal TCV. Though companies reported healthy TCVs in Q2FY23, management commentaries suggest clients are prioritising spends towards quicker-return on investment projects and have greater focus on cost optimisation. Areas of weak demand widened further in Q2FY23," ICICI Securities said in a note.

During the second quarter, IT firms reported elevated level of employee attrition despite some signs of stabilization. This coupled with high wage cost and resumption of work from offices is putting margin pressure on the entire industry. To compensate such pressure on margin, each firm is looking for high margin deals to meet their margin guidance. Many brokerage firms are expecting margin improvement in the third quarter.

"We expect margins to improve from Q3FY23 as premium paid for backfilling attrition reduces and utilisation improves as freshers become billable," said ICICI Securities.

The order book of Indian large IT firms remained robust in second quarter. TCS closed outsourcing contracts worth $8.1 billion, a rise of seven per cent over last year. Infosys reported its best large deal wins in seven quarters as its total contract value from large deals stood at $2.7 billion compared to $1.7 billion in the previous quarter. Similarly, HCL Tech, which reported a stellar set of numbers in Q2, closed deals worth $2.38 billion. However, mega deals remained absent for the second consecutive quarter from the market.