Increasing operating margins top of mind at Infosys

Written by P P Thimmaya | Bangalore | Updated: Oct 14 2013, 20:46pm hrs
Infosys SDShibulalS D Shibulal, CEO of Infosys, speaks during the announcement of the company's quarterly financial results at their headquarters in Bangalore. (Reuters)
Indias second-largest IT exporter Infosys is working on getting back its leading position in operating margins, an area where it was once totally dominant.

The operating margins of Infosys at the end of second quarter of FY14 stood at 23.5% nearly the same for the last three quarters is much lower than its nearest competitor Tata Consultancy Services (TCS). The Mumbai-headquartered firm, the country's largest IT vendor, is holding steady at 27%.

Now, under the leadership of Murthy, who took over as chairman on June 1, Infosys is working towards the goal of industry leading growth with superior margins.

Talking to FE, Rajiv Bansal, chief financial officer (CFO), Infosys, said the company is taking numerous initiatives to improve operating margins, which are unlikely to provide any near-term gains. In the short term, we are not that worried, but in the medium term, we should get margins superior to anybody else in the industry. We would be setting the benchmark, he said.

In fact, there was a period when TCS, despite a larger revenue base, had lower profits than Infosys. Today, the tables seemed to have turned completely with TCS widening the gap with Infosys both on the revenue and operating margins front.

Bansal said it would be important now for Infosys to make all the right investments now to ensure that that their growth remains steady.

The IT major has started putting more resources into its sales force. It has brought in changes in salary structure with rising fixed component and has made higher investments in technologies.

It has also started on a cost optimisation drive bringing down redundancies. Those resources who were on the higher salary structure have witnessed some rationalisation, depending on the needs of the organisation.

There are other levers as well: Infosys will be looking at increasing the utilisation level which is currently at 77% level to around 82-83%; It also plans to better its mix of onsite:offshore parameters which is now in a 30:70 ratio. The attempt is to move it to 20:80.

Said Dipen Shah, head of private client group research, Kotak Securities: The company has reported better revenue growth performance over the past couple of quarters. To that extent, we expect the valuations to improve from the current levels.

The improvement in operating margins for any IT services company depends on both external and internal factors.

During a period of steady demand or growth, it is possible for companies to improve upon its margins as most of the costs are fixed.

For Infosys, it would be a long trek before it can reach its desirable goal of superior operating margins. Murthy has already remarked that it would take about 36 months to build a desirable Infosys.

Much also will depend on what kind of margins Infosys would be able to hold at the end of current financial year to make further improvements. Said Bansal, It is important for us to see what would be our margins at the end of this fiscal as that would set the base for the next year.