Indian IT services companies will see operating margins improve in the third quarter of financial year 2025 and short to medium-term, as rupee continues to weaken against the US dollar.
The US market accounts for nearly 50-65 percent of IT services business and revenue, especially for the top players including Tata Consultancy Services (TCS), Infosys, HCLTech, Wipro and Tech Mahindra.
Analysts expect a short- to medium-term impact on the back of depreciating rupee, which has weakened by 3 percent against the US dollar in 2024 and is set to post annual losses for the seventh year in a row.
According to Phil Fersht, CEO, HFS Research, a global business research consultancy, the margin uptick will be primarily driven by the savings from lower labour costs in India. “Most of India’s tech industry supports primarily US enterprises, which pay for Indian talent at US dollar rates, so lower local costs only improve margins and keep them price competitive,” he told Moneycontrol.
At present, this will also be a shot in the arm for several IT companies including Infosys, HCLTech, LTIMindtree, and L&T Tech Services, who had to shift their wage hikes to the third quarter of FY25 to defend margins in the quarter-ended September 30, 2024.
Though the companies were bracing for a hit on margins on the wage front, as well as from furloughs, the depreciating rupee would be a saving grace.
Not just the Indian IT companies or software exporters, but the US corporations who are rapidly scaling their back office presence in India through GCCs will also benefit from the lower local labour costs and look to expand their talent base in India. This would include global technology giants such as Microsoft, Salesforce, and AWS as well, Fersht said.
Industry experts, however, said the margin jump wouldn’t necessarily be absolute as the company’s hedging strategies too will have a role to play.
“The bump in margins due to a weakening rupee while welcomed by the IT industry is only worth so much. The impact depends on a provider's geographic revenue split, (currency) hedging strategies and other factors and is no yardstick,” said Gaurav Parab, a principal research analyst at consulting firm NelsonHall.
Parab added that the dollar is expected to strengthen further in the initial stages of the incoming US administration and the confidence coming from the expected investments in the US economy under Trump 2.0 administration is where the real long term value lies.
Gaurav Vasu, founder and CEO, market intelligence firm UnearthInsight, believes the impact on margins will be more pronounced in Q4 or the first quarter of FY26 than Q3, even increasing by 100-200 basis points.
“Even for the full FY25, positive margins will be coming if there’s a rupee depreciation and lower labour costs impact. But, companies have also been spending more on generative AI experiments,” he told Moneycontrol.
The Wage-Hike Factor
In terms of quarterly trends in margins, if Q2 data were to be mapped in Q3, aggregate margins may inch up by 25 basis points (bps) sequentially. Individually, HCLTech would lead the pack while Coforge would trail all others, according to brokerage firm Jefferies.
Meanwhile, Pune-headquartered Tech Mahindra had already set forth its focus for Q3 and upcoming quarters in Q2 itself: protect its margins over chasing large deals.
CEO and MD Mohit Joshi, addressing analysts during the company's post-earnings conference call on October 19, said that it is very tempting to do deals that can potentially bite later in this demand environment. “We are shying away from that," he added.
The company's focus on boosting margins reflected in its Q2Y25 performance, as the metric rose by 110 basis points quarter-on-quarter to 9.6 percent.
Also read: Rupee recovers on RBI support after testing new low of 85.81, still falls most in seven months
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