Indian IT firms face margin squeeze amid triple threat
NEW DELHI, INDIA — Indian outsourcing companies are grappling with a significant margin squeeze in FY24, driven by aggressive deal pricing, rising employee costs, and the pressure to boost revenue despite tight global budgets.
Tata Consultancy Services (TCS) stands out as the only major player managing to buck this trend.
“Deal pricing is so competitive, service providers cannot reduce costs fast enough anymore to maintain operating margins,” said Phil Fersht, CEO of HFS Research.
Service providers are negotiating price decreases of up to 20-30% to win deals, especially renewals of existing contracts.
Rising employee costs
Infosys, the second-largest software services firm in India, saw its margins dip to 20.1% in Q4 FY24 from 21% a year ago. The firm also reported a full-year margin of 20.7%, impacted by contract renegotiations and increased salary and branding costs.
Similarly, HCLTech‘s EBIT margins for the same period fell to 17.6% from 18.2% last year. The company attributed its lower margins to seasonal slowdowns and guided conservatively in the 18-19% range.
CEO C. Vijayakumar noted, “Software vendors are able to get away with significant price increases, which customers are left with no option but to accept.”
Revenue pressure
Despite the challenging environment, TCS managed to boost its margins to 26% in Q4 FY24, up from 24.5% in the same quarter the previous year. Wipro also saw a slight improvement, with margins rising to 16.4% from 16.3% a year ago.
Hansa Iyengar, a Senior Principal Analyst at Omdia, attributed the margin stagnation to a mix of factors, including wage inflation, supply chain pressures, and a shift towards lower-margin projects.
“TCS, the industry leader, seems to have navigated these challenges more effectively,” she said, adding that margins are likely to stabilize in FY25 as companies adjust to the evolving cost landscape.
Future outlook
The Tata Group firm highlighted that it would face headwinds in Q1 FY25 due to employee increments.
A recent Jefferies report also noted that further margin expansion might be difficult, given that utilization levels are near their peak for most IT firms.
Gaurav Vasu, founder and CEO of UnearthInsight, pointed out that investments in generative AI are impacting wage bills. “Another impact on the wage bill is investments for Gen AI in two ways. One is through new hires for Gen AI capability and the second is wage corrections for up-skilled/cross-skilled resources,” he said.
The significant push towards training and upskilling to build future-ready talent for newer deals could further elevate costs, impacting margins.
In summary, while TCS has managed to maintain and even improve its margins, other major Indian IT firms are struggling with the combined pressures of competitive pricing, rising employee costs, and the need to boost revenues in a tight global market.
