‘IT firms’ margin stress to continue’

Unable to take advantage of rising spend on digital: analysts

Published - April 11, 2019 10:34 pm IST - Bengaluru



The Indian IT business is getting more commoditised, resulting in stiff competition and lower margins in legacy business, according to industry experts.

Pricing seems to be under pressure, reflecting in the declining margins of Indian IT companies. The trend is likely to continue for sometime, they said. The margins of most IT services’ players have come down in the last few years despite the depreciation of rupee against the dollar and other major currencies. Macro worries on slower global growth are also proving challenging.

“We are seeing an unique situation where the macro challenges of slower global growth impacting revenues of large IT services companies coupled with businesses getting more and more commoditised reflecting in lower margins,’’ says V. Balakrishanan, former CFO, Infosys.

Peter Bendor-Samuel, CEO and founder of Dallas-based research and management consulting firm Everest Group, says, “We expect margins of big Indian (IT) service providers to continue to erode. We believe that digital is less profitable than the traditional labour arbitrage model.”

Digital transformation

“We saw each quarter this year decelerating. However, the overall picture for the Indian IT industry is much rosier than the overall economic outlook as we believe digital transformation has a lot of momentum causing the service sector to substantially outperform the rest of the global economy,’’ he adds.

Also, with so many new technologies like cloud, mobility, IOT, AI, etc., disrupting the business world, customers are spending more money on the digital side of their business. This is to some extent eating into the budget and shrinking the space available for spending on legacy software. Large IT services companies in India have traditionally not invested much on the digital side and hence, are not able to take full advantage of this spending, say analysts.

Hansa Iyengar, senior analyst — advanced digital services of the London-based Ovum Technology Research says, “Digital requires closer presence to customers and we see that in the form of accelerating investments in near-shore centres in the U.S., Europe and Australia and New Zealand. Even this is going to put additional pressure on margins of Indian tech players in the near term as costs increase.’’

The cost of doing business in the U.S. is going up due to visa restrictions and the need to hire local talent and manage them.

The industry is already operating at very high efficiency levels with high utilisation rates (more than 80%). With the pricing not going up and other costs like employee costs rising every year at least to meet the inflation levels, there is definitely immense pressure on the margins.

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