Markets

IT & BPO: Revenues grow but profit margins weaken

Rajalakshmi Nirmal | Updated on January 27, 2018 Published on February 24, 2016

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Sector faces challenging year with US slowdown and visa fee hike

The last year was not a bad one for the IT sector despite a worrisome global situation.

The top five Indian IT companies reported dollar revenue growth of 6.8 per cent in the nine-months ended December 2015 versus the same period in the previous year. Healthcare and retail are two verticals where most IT companies witnessed good growth.

However, there was a large divergence in performance. While Tech Mahindra delivered the highest growth of 12.5 per cent, TCS fared the worst with revenue dropping 6.4 per cent. The year saw Infosys racing ahead of TCS as efforts to push digital revenues reaped dividends. Dollar revenues were up 7.5 per cent for Infosys.

Profit margins, however, thinned as pricing pressure on traditional services increased. Enhanced investments in new age digital solutions, margin dilutive new acquisitions of some companies and cross-currency headwinds too hurt margins.

Tech Mahindra, for instance, saw operating margins drop from 20.1 per cent in the December (2014) quarter to 15.01 per cent in the June (2015) quarter.

However, with cost cutting, improved employee utilisation levels and better onsite/offsite mix, Tech Mahindra and HCL technologies managed to expand margins sequentially in the December quarter.

Valuations of both large and mid-tier IT companies have corrected over the past year. Infosys and TCS, for instance, have seen PE (on trailing 12 month earnings) come down from 19-21 times in October to 16 times now.

Besides worries on the slowdown in the US manufacturing sector and the rout in commodity markets impacting order flows, the increase in US H-1B visa fees too added to the negative sentiment. The US doubled H-1B visa fees to $4,000 and L-1 visa to $4,500 in January.

The big Indian IT companies have over 50 per cent of their workforce at onsite locations that employ H-1B visa holders. The fee hike will cost the industry an additional $400 million a year, according to Nasscom. For the industry that generates $100 billion of revenue, the impact on margins may be 30-40 basis points.

Growth estimate

Recently, Nasscom changed its 2015-16 growth estimate for the industry from 12-14 per cent to 12.3 per cent.

For the next financial year, it has said that the growth can be even lower, at around 10-12 per cent, indicating that the sector may continue to face headwinds on the revenue front.

Published on February 24, 2016
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