Infosys has reported a drop of over 200 basis points in its operating margin, which traditionally has been its forte, due to a slip in pricing, adverse currency movements and slower deal ramp-ups. The operating margin has declined from 25.65 to 23.55 while most analysts were expecting it to be around 24.50.
Pricing declined by 0.7% quarter-on-quarter (q-o-q) against 3.7% q-o-q in the December quarter. This is despite the utilisation rates improving q-o-q to 70.9% against 70.1% in previous quarter. Infosys reported a utilisation rate of 73.9% excluding trainees as against 73.2% in the last quarter.
?The lowest bidder gets the volumes. Pricing is under pressure. There is a big link between margins and revenues and we don?t have the pricing power with our strategic accounts,? said Rajiv Bansal, CFO, Infosys. He added that Infosys has pricing power only with regard to 32% of its revenue while rest are strategic accounts. The company will focus on efficiency and utilisation to improve margins in such cases, the CFO said.
During the October-December period, the company reported an operating margin erosion of 66 basis points to 25.7% against 26.3% in Q2, which the company attributed to wage hike and closure during the holiday season.
During Q3, TCS reported an operating margin, which rose by 51 basis points, of 27.3%, offsetting the impact of forex fluctuations with a boost in employee productivity and widening the operating margin with Infosys. TCS for the first time had surpassed Infosys in margins in the Q2 of FY13, reporting an operating margin of 26.8% compared with 26.3% registered by Infosys during second quarter.
?This is really worrying. The company faces technical and structural issues and the lack of pricing power is disappointing,? said Sanjeev Hota, assistant vice-president, research (IT), Sharekhan. According to him the company?s operating margin has declined by by 500 bps over the past three years even as rupee depreciated by 15% during this period.
Infosys has traditionally enjoyed superior operating margins compared with other Indian IT vendors. However, TCS in the last couple of years has been able to consistently deliver better margin performance thereby narrowing the gap with Infosys.
This improvement by the Mumbai headquartered TCS has a lot to do with driving internal efficiencies within the company in terms of utilisation and also deploying a lower employee wage base.
Hota added that there is no volume growth if Lodestone revenues are set aside. ?What is even more worrying is that the company maintains that pricing power is declining and they are seeing further margin pressure at a time others are doing better than Infosys,? he said.
?The lack of stronger revenue growth despite the pressure on realisations which the company is facing in the non-discretionary space, is concerning. Infosys has also discontinued giving EPS guidance for the year, which reflects pricing and margins uncertainty,? said Dipen Shah, head of private client group research, Kotak Securities.