IT margin pressure likely till 2019-20, says report

Indian information technology service providers are likely to face subdued operating margins till 2019-20, according to a report by brokerage firm Prabhudas Lilladher.

The margins for TCS, Wipro, Infosys and HCL Technologies are between 20 per cent and 26 per cent, substantially higher than global rivals IBM, Accenture and Capgemini. But pricing pressure in traditional technology services and slow growth in emerging technologies may turn out to be the spoiler for Indian infotech companies.

“Between 2013-14 and 2016-17, Infosys’ margins have remained relatively stable, while the other three companies showed erosion,” wrote Madhu Babu, analyst at Prabhudas Lilladher.

Indian infotech companies have increased onsite investments and expanded onsite delivery centres. Wipro, Tech Mahindra and Mindtree have acquired onsite-centric firms to acquire new skills. “These factors, coupled with pricing pressure and  subcontracting expenses, led to the squeeze on margins despite the rupee depreciating over 45 per cent in six years,” Babu added.

Visa constraints in the US might result in higher subcontracting costs, Babu said. Delays in integration of businesses and employees of acquired firms had also affected margins for some Indian infotech companies, he added.

Noting that infotech stocks had stagnated in the past three years, the report said, “Good capital allocation could help companies in this phase of transition. Tier-I vendors should have a consistent and steady buyback plan.”