IT majors suffer declining operating profit: Edelweiss

Font Size

Print

Feedback

Email

Discuss

Indian IT majors are caught in a trend of declining operating profit per employee and have to focus on non-linear growth over the next few years to arrest this trend and create higher value for shareholders, says a research report by Edelweiss Capital.

The firm studied business models of Indian IT companies like Infosys, TCS, Satyam and Wipro against the business model of global giant Accenture.

On the performance of Indian firms, it observes that in recent past, stock returns in the Indian IT services large-cap space have been mirroring difficulties in creating incremental shareholder wealth. If one were to study the companies’ parameters based on per employee metrics rather than traditional metrics such as operating margins, there are “possibilities of diminished shareholder wealth creation in future of the Indian IT industry”, according to the report.

In the past two-three years, the sector has delivered returns predominantly on the back of employee growth so far, which has offset the weakening of per employee metrics. However, going forward, there is limited scope of using employee growth to drive shareholder returns, stated the report.

Unless the decline in operating profits/employee (EBITDA/employee) is arrested, Edelweiss believes equity returns of 12-13% will be hard to obtain beyond a horizon of three years in the large-cap Indian IT services space.To beat this benchmark, firms must work towards making discernible progress in their non-linear initiatives.

The report notes that Infosys has superior per employee metrics (operating profits and cash flow) in comparison to other players in country’s IT space followed by TCS and Satyam.

Meanwhile, global player Accenture’, which has lower margins than Infosys, enjoys a per capita cash flow more than double than that of Infosys; with per capita EBIT hovering at 20% higher levels than that of Infosys despite Accenture having nearly double the employees.