TCS, Infy to maintain higher margins

Despite lower growth scenario; companies say reworking strategy

Growth is getting subdued for Indian's top-tier information technology service entities but the biggest two, Tata Consultancy Services (TCS) and Infosys Technologies, have maintained they will hold on to their higher margin bands.

TCS has said it will continue to maintain this at 26-28 per cent. Infosys has said theirs' will be in the range of 24-26 per cent. This despite the fact that TCS has seen one of the slowest sequential growths in the past 10 years and, though Infosys has improved its performance, it has forecast subdued annual revenue growth.

GROWTH PANGS

• TCS says it will continue to maintain higher margin bands at 26-28%
• Infy says margins will be in the range of 24-26%
• Though flat revenue growth was registered for the Sept quarter, TCS improved its operating margins by 90 bps on a sequential basis
• In the case of Infy, the company managed to beat its sequential growth numbers

TCS registered flat revenue growth (over a year before) for the September quarter. It managed to improve its operating margins by 90 basis points (bps) on a sequential basis, to 26 per cent. This despite currency headwinds having a negative 40 bps impact on its margin.

Other than efficiency improvement, some of the things that has allowed TCS to manage its margins include lesser variable payout, less number of visas being filed and tight execution of fixed-price contracts.

"Variable pay is linked to performance of each business unit. Every quarter, units that have performed well get variable pay and those which have not performed get less payout. By and large, the variable pay and sale incentives have been consistent. This time, some units have been impacted," said N Chandrasekaran, managing director, during an analyst call. Data from the company showed employee cost for the quarter declined on a sequential basis to the extent of 70 bps improvement.

The MD also acknowledged during the call that the company had been trying to change its business model, involving lesser dependence on visas. "We have been on this model transformation route for some time. For margin improvement, you need a lot of discipline and we have leveraged multiple factors, like the way we execute fixed-price engagement. It's a journey that will continue," he added.

In the case of Infosys, though the company managed to beat its sequential growth numbers, the annual forecast cut at eight to nine per cent suggest growth is subdued. Yet, it maintains the margins will be in the band of 24-26 per cent.

M D Ranganath, its finance head, said the margin in the short term is a product of three things. First, revenue growth. Second, pricing. Third: What are the operational efficiency improvements that people do to offset the pricing impact.

"In this quarter, we have had all the operational efficiency areas improving, like utilisation, which went up from 80 per cent to 82.5 per cent, and onsite effort, reduced to 29.7 from 29.9 per cent. Both put together, we had improvement of 100 bps, a one per cent increment in margin. Likewise, we have reduced sub-contract cost, which used to be 6.3 per cent. We have brought it down to 5.4 per cent. These are all the levers which we have utilised consistently during the past couple of quarters," he added.