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Last Updated : Mar 01, 2019 10:03 PM IST | Source: Moneycontrol.com

IT firms' margins on decline as overseas costs continue to rise: Report

Indian IT firms have performed consistently well in the last few quarters reporting revenue growth in the range of 10-15 percent. However their margins are feeling the pressure in part due to visa issues and increasing onsite cost because of that.

Swathi Moorthy @kpswathi
 
 
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Indian IT firms have performed consistently well in the last few quarters reporting revenue growth in the range of 10-15 percent. However their margins are feeling the pressure in part due to visa issues, which lead to increasing onsite costs.

A report by Everest Group that analysed the operating margins of top five IT firms - TCS, Infosys, Cognizant, HCL, Wipro - in the last three calendar years 2016, 2017 and 2018. The report noted that the companies' operating margins have been declining consistently since 2016, while the operating margins of Indian service providers in 2016 was 21.8 percent, but it dropped to 21 percent in 2017.

Though the margins did show a slight improvement in 2018 at 21.4 percent, the report noted that the benefit should have been higher due to the rupee depreciation benefits. Without such benefits, the margins would have dropped to 19 percent . The report said, “In CY18, benefits led by INR depreciation against USD played a major role in Indian service providers’ margin improvement story."

Most industry people agree that overseas hiring is one of the key reasons for margin compression. Companies had to step up their overseas hiring due to visa issues not only in the US, which is one of the biggest markets for these IT majors but also in other European geographies.

Akhilesh Tuteja, Global Cyber Security practice Co-leader, Head – Risk Consulting and Partner, KPMG in India, said that the visas issue is not going to end anytime soon. “It is rather a blessing in disguise. It makes companies more customer-centric,” he added.

But the challenge is in finding talent overseas. Peter Bendor-Samuel, Chief Executive Officer, Everest Group, said, “We just don’t have enough people in the US, especially the kind of skill sets companies are looking for is not there.”

The alternative is for companies to invest in training, which could lead to an uptake in attrition as more competitors want trained talent.

Another area of concern is revenue from services, as more clients demand that companies pass on the benefit of automation. Tuteja explained that most clients cannot understand that companies have already invested significantly in the infrastructure and it would be sometime before they can see the return-on-investment. “You see a lot of work coming in but less revenue from them,” he added.

Stevan Hall, President, Information Services Group (ISG) – Europe, Middle East, Africa, said that margins could be improved if a company has a non-linear revenue model such as revenue based on outcome-based work. Until then margins will continue to suffer, he added.
First Published on Mar 1, 2019 09:52 pm
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