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Tuesday, Jan 28, 2003

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Lower pricing, costlier hires — Software services margins pressured

Abhrajit Gangopadhyay

"Contract employees, who come at a higher price level than the regular hires and strategic recruitments, would continue to keep the margins squeezed for the next few quarters''.


THE increasing cost for acquiring business through new hires and lower rates, peaked utilisation and technology shift will not help software services companies to reverse its sagging operating margins in the near term, analysts said.

Top software services firms such as Infosys, Wipro, HCL Technologies and Satyam reported decline in their operating margins for the December quarter sequentially as they invested more on experienced recruits to fetch them large outsourcing deals.

While operating margins for the largest listed software firm, Infosys slipped to 35 per cent from 37 per cent, Satyam's margins fell to 30.5 per cent topping its guidance.

"We do not see the margins coming back to the previous levels," said Mr Hrishi Modi, senior analyst with ASK Raymond James. "The cost structure has undergone a change," said Mr Ganesh Duvvuri, IT analyst with Alchemy Shares and Stock Brokers.

Contract employees, who come at a higher price level than the regular hires and strategic recruitments, would continue to keep the margins squeezed for the next few quarters, he said. "Especially when the sales cycles continue to stay elongated, such recurring costs would put pressure on the margins," he added.

Infosys hired 104 sub-contract employees to work mostly on onsite locations in specialised projects for the December quarter. For Infosys, close to 0.5 per cent drop in margins came from sub-contract hiring of specialised employees and 0.4 per cent due to increase in foreign travel expenditure.

Wipro reported a 1.3 per cent increase in salary and general expenditure for its December quarter and expects that such expenses to sustain momentum going forward. "We need to spend more on sales to get large deals," said Wipro CFO, Mr Suresh Senapaty.

Moreover, the local vendors were currently operating at a lower price platform, which automatically put pressure on margins, Mr Modi said.

Infosys reported a 0.9-per cent drop in its rates, though its volume grew by 10.5 per cent in the third quarter. For HCL, EBITDA margins declined in the core software business by 240 basis points, led by 400-basis point decline in utilisation rates to 80.3 per cent and decline in offshore realisations by one per cent. EBITDA margins have come off by nearly seven percentage points in the last four quarters.

For Satyam Computers, EBITDA margins declined by 70bps to 30.5 per cent, though billing rates remained flat. The decline in margins is on account of a 17-per cent sequential growth in selling, general and administration spend, increased use of sub-contractors, increase in travel expenditure related to new projects initiated and change in revenue mix to onsite.

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