The top four IT companies — Tata Consultancy Services (TCS), Infosys, Wipro and HCL Technologies — reported steady decline in operating margins for the quarter ended March 31, 2022, mainly driven by supply side challenges with higher employee costs, high attrition rates and pricing pressures.
TCS’ operating margin stood at 25 per cent in Q4FY22, remaining flat on a q-o-q basis; Infosys’ operating margin dropped to 21.5 per cent from 23.5 per cent last quarter. Wipro’s operating margins too fell to 17 per cent from 17.6 per cent while HCL Technologies’ operating margin was down to 17.9 per cent from 19 per cent last quarter.
HCL’s talent model transformation
C Vijayakumar, CEO and MD, HCL Technologies, said during the company’s Q4 earnings call, “This dip is largely due to the talent model transformation that we are investing in, which involves large scale fresher hiring, nearshore delivery scale up, and talent skilling and training investments.”
“We believe that this investment is very timely. What we have been doing over the last three or four quarters has helped us deliver strong momentum in our services business. And this is also critical for our medium-term growth…We’re seeing increasing acceptance of offshoring, especially in Europe, due to the secular talent shortage trend and emerging geopolitical risks,” he added.
TCS sees currency support
TCS reported the industry leading operating margin, but it was still down by 1.8 per cent on a year-on-year basis, having reported 26.8 per cent in Q4 FY21.
Samir Seksaria, CFO, TCS, said, “Our operating margin in Q4 stayed flat sequentially at 25 per cent. As in the previous quarter, we had headwinds of about 90 basis points from ongoing supply side challenges — which were mitigated through operational efficiencies and 10 basis points of currency support.”
“For the full year, our operating margins continue to be industry-leading at 25.3 per cent. Annual increment, tactical interventions and increased subcontractor usage represented a headwind of 330 basis points, offset to some extent by operational efficiencies, improved realisation and some currency support,” he said.
“In the long-term, we are well placed to improve. There might be some volatility in the short term and we will double down on our levers in the mid-term. This will come from better realisation, including pricing and engagement; better portfolio mix; and operating levers like automation and productivity. We look forward to support from the currency as well,” Seksaria had said while addressing the media.
Infosys’ investment plans
Infosys will not only be investing in skilling and retaining talent, but also in expanding other segments of the business, including sales, marketing, and digital and cloud driven offerings.
“In the backdrop of various supply side pressures, we rolled out various measures to reduce attrition — higher compensation increases, higher promotions and skill-based interventions, in addition to higher subcons,” Nilanjan Roy, CFO, Infosys, said during the earnings call for Q4.
He added, “We will see where we end up, but the comfortable range for FY23 is 21 to 23 per cent; nothing more than that. This is a robust demand environment and we do not want to lose highly skilled talent. So, we are rolling out interventions there — on the sales side, the marketing side, digital and cloud. We have seen the success of these interventions over the last 4 years. This is something which we have looked at and baked into the margin for next year.”
Infosys was recently called out for introducing a non-compete clause in its employee contracts, restricting them from working with competitors and clients for six months after quitting the company. The development came after the IT services major reported a higher attrition rate in Q4.