TCS, Wipro, and Infosys are chasing growth but losing margins in the process

• Indian IT companies are growing faster in the US market than Europe for the first time in three years.
• Pressure from deal ramp ups, increasing visa costs, rising subcontractor costs and higher salary payouts has taken a toll on margins.
• Infosys and TCS are the worst hit by the lack of H1-B visa applications.

Indian IT sector has a lot to fear but has more to gain as well. Unlike many companies which are in the throes of a slowdown, the IT sector has bigger fish fry. European markets which are its mainstay are growing slow, and the US is dealing with recession fears.

Adding fuel to the fire, the US government is making it tough for them to operate, with tighter immigration laws which are taking its toll.

Yet, IT companies are showing signs of resilience. For the first time in three years, US led growth is ahead of growth from the European Union, according to Nomura’s market analysis.

Ramping up operations in the US

It will neither be cheaper nor easier to play a lot more in the US markets, as their ability to send employees to service the clients will not be easy. To counter the aftermath of diminishing manpower in the US, these companies have ramped up acquisition and large deals to make up for it.

Infosys and TCS are the worst hit by the lack of H1-B visa applications.

Yet, these companies are trying to gain more clients in the country and adding manpower. The acquisition and deals, in turn, are the primary reasons why momentum in US markets is greater than growth in European markets at a yearly growth rate of 12.4%.

And they will continue to gain more deals, believes Nomura.

The negatives bearing IT down

Increased number of large size deals is causing companies to miss margin estimates.

Additional pressure from increasing visa costs, rising subcontractor costs and higher salary payouts has also taken a toll on margins.

Hiring has grown at a yearly rate of 10% and attrition levels remain elevated at 17% to 22%.

Three out of the four Indian IT giants — TCS, Infosys, HCL Technologies and Wipro — missing their growth expectations and all them missed margin expectations.

Though IT companies chase other markets, they are not immune to Indian slowdown blues. The stagnation in growth is attributed to slowdown in banking, financial services and insurance (BFSI) coupled with softness in automobile manufacturing.

BFSI’s soft growth and the future outlook is an indicator of the challenges that IT companies are facing in capital markets, large EU banks and regional banks in the US.

Retail growth was also flat at 7% to 9%.

The brighter side of IT

In spite of dragging factors, the IT sector has a few fast growth segments like energy which is growing at 12.7%. Telecom is also is growing at 13.9%.

The IT sector, overall, is a part of a growing disruptive transition across the country and the world — digitisation.

Digital growth has also been strong for IT companies like TCS, Infosys and Wipro during the first quarter for the current financial year. They have shown quarterly growth of 42.1%, 41.9% and 34.2% respectively.

Going forward, Nomura expects Indian IT companies to price their products aggressively in a bid to win more market share.

The IT sector is one of the core sectors of the Indian economy. GDP growth is at 5% — a six year low for the country — and re-energising the IT sector which is a huge chunk of services sector, is a key part of the puzzle.

See also:
H-1B visas: US immigration seems to like certain companies more than others

Rise in US H-1B visa rejection may force Indian tech companies to look at M&A

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