Operating margins to remain stable at IT cos

We can expect the industry to continue to shed excess staff as it right sizes against the lower growth expectations for next year - Peter Bendor Samuel, CEO, Everest Group, tells Bizz Buzz

Staying Afloat

♦ Despite tepid revenue growth, margin to remain steady or improve

♦ Many cost optimisation measures are being followed

♦ Shedding excess staff, improving utilisation some key initiatives

♦ Interestingly, Infy and HCL Tech, which reduced their revenue guidance for FY24, have maintained margin guidance

Bengaluru: Operating margin of Indian IT firms is likely to remain steady in coming quarters despite visible slowdown in demand as companies undertake across the board cost-cutting measures to reduce operational costs.

Experts are of the opinion that domestic IT firms will continue to reduce their headcount apart from hiring only on need basis to contain cost. Moreover, their focus on improving employee utilisation and right-sizing of pyramid will continue to support operating margin profile in coming quarters.

“We can expect the industry to continue to shed excess staff as it right sizes against the lower growth expectations for next year,” Peter Bendor Samuel, CEO of global consultancy firm, Everest Group, told Bizz Buzz.

During the second quarter, margins of many Indian IT firms improved or remained stable despite high wage cost.

“We had a good quarter two, and we had a 50 basis point improvement from our Project Maximus on cost optimizations. That gives us comfort for the rest of the year, and that the program is--of course much longer, which will take not only this year but into next year as well,” Nilanjan Roy, Chief Financial Officer at Infosys, had said during the analyst call.

In the second quarter, Infosys reported 40 basis point improvement in operating margin at 21.2 per cent.

Tata Consultancy Services reported a 110 basis point improvement in its operating margin at 24.3 per cent during the July-September period.

“Given the current macro uncertainty impacting top line, our margin is fairly decent. Our focus will be to use the existing levers, that is, productivity, utilization and further optimizing subcontractor expenses to continue the journey. And if growth returns, it will only help accelerate this journey,” Samir Seksaria, CFO at TCS, had said during the analyst call.

HCL Tech saw the most improvement in its operating margin on sequential term among all the top three firms. Its operating margin came at 18.5 per cent, 154 basis points improvement over the previous quarter.

“We drove a lot of efficiency in our managed services operations driven by our automation capability. A lot of freshers, who we have hired in the past 18 months, got trained and they finally got deployed in an economic manner during the last quarter. Our subcontracting cost also got optimized during the quarter. We are confident that we would be able to come within our stated guidance of 18 per cent to 19 per cent for the year,” says C Vijayakumar, CEO of HCL Tech.

Interestingly, while both Infosys and HCL Tech have reduced their revenue growth guidance for FY24, they have maintained margin guidance on the back of such initiatives.