TCS widens lead over Infosys on operating margin

Written by Debojyoti Ghosh | Debojyoti Ghosh | Bangalore | Updated: Jan 15 2013, 05:53am hrs
The countrys largest IT services exporter, Tata Consultancy Services (TCS), has widened its lead over its nearest rival, Infosys, in terms of operating margins, outpacing it for the second time in a row during the October-December stretch.

For the third quarter, TCS reported an operating margin (OPM) of 27.3% against Infosys 25.7% during the same period. During the December quarter, TCS had an operating margin expansion of 51 bps, while Infosys witnessed a margin erosion of 66 bps, owing to wage hikes.

Experts say an improvement in terms of utilisation rate and deploying a lower employee wage base have led to better margin performance for TCS. The utilisation level of TCS reached a high of 81.7%, excluding trainees, in Q3, while Infosys had an utilisation rate of 73.2%.

However, sequential revenue growth of the Bangalore-headquartered software services firm was faster than its larger rival, TCS, during the third quarter. Infosys topline grew 5.7% quarter-on-quarter to Rs 10,424 crore, while TCS registered a 2.9% sequential revenue growth to Rs 16,070 crore.

Traditionally, Infosys, which prefers not to sacrifice margins to gain higher volumes, has enjoyed better operating margins compared with other top-tier Indian IT vendors. But, over the last few years, TCS has consistently managed to deliver better margin performance, narrowing the gap with Infosys.

In Q2, TCS had overtaken Infosys on the operating margin front, albeit narrowly. The Mumbai-headquartered IT firm reported OPM of 26.8% against 26.3% registered by Infosys during the same period.

TCS chief financial officer S Mahalingam said, Our superior execution in this seasonally weak quarter has delivered productivity gains and an expanded operating margin. Our business model of delivering growth with the desired profitability requires us to invest in the front-end and in new capabilities and we will continue to make those investments.

Infosys doled out an average 6% hike for employees in India during the December quarter and implemented 2-3% increments for on-site people in the fourth quarter. Infosys expects the margins to drop by 1% in the fourth quarter due to the impact of wage hikes for on-site employees.

Despite a wage hike during the quarter, Infosys operating margin was better than expected. But on the utilisation front, TCS posted 72.1%, including trainees, while Infosys was 70.1%. As productivity of employees increases, the margin also goes up. On the volume front, Infosys has been lagging for last several quarters, which has impacted their margin, said Ankita Somani, IT analyst, Angel Broking.

At the end of third quarter, the total workforce of TCS stood at 263,637 with attrition rate in IT services falling to 9.8%. For Infosys, the attrition level during the October-December period was flat at 15.1%.

Rajiv Bansal, CFO, Infosys, had said during the quarterly earnings that Q3 operating margin was 26.1%, excluding the charges of the Lodestone acquisition, a decline of 0.2%, primarily due to the rupee appreciation. Infosys acquired the Swiss consulting firm Lodestone last year.