Infosys is no longer leader in the Indian IT industry when it comes to margins. TCS has, in the June 2011 quarter, equalled its smaller rival?s margins of 26%, benefiting from an outperformance in volume growth. On an average, Infosys saw volumes grow 3.2% in the last four quarters compared with TCS whose volumes grew at about 7% in the same period.
Analysts ascribed the shrinking margin difference to a lot more ? TCS, for instance, has been able to take advantage of customer-specific issues at Infosys where a large telecom client has been ramping down business. Secondly, India?s second largest IT exporter may not be enjoying price premium it commanded a few years ago with the commoditisation of IT services.
Dipen Shah of Kotak Securities feels Infosys? pricing has come off. ?There could be customer-specific issues as well, like in the telecom sector. The business mix has also changed with TCS probably getting more revenues from higher value-added services. Thirdly, TCS made acquisitions in the past. These companies, over time, have improved their margin profiles,? he said.
Shashi Bhushan of brokerage house Prabhudas Liladhar said shrinking margin gap is definitely related to client issues at Infosys. ?Top clients of Infosys ramped down while some clients in TCS ramped up. However, for TCS, the easy play is behind them. The transition in Infosys is over, and they will catch up in terms of volume and margin growth,? he said. Infosys has been undergoing one of the biggest restructuring in its 30-year old history. The past few months have seen management transitions as well as structural changes in its verticals.
?In terms of pricing, nobody has been able to get a premium pricing in the market. Infosys still has some premium positioning. The company should start performing better in the second half of FY 12,? Bhushan noted.
Sanjeev Hota of Sharekhan said TCS? higher volume growth has helped the firm to manage costs better. ?Infosys? top line has been suffering while its costs kept rising as the firm hired to build up a bench. In terms of high value business mix, the future looks good for Infosys. The discretionary revenues of both the firms are around 35%. However, in terms of pure consulting revenues, Infosys is ahead of TCS,? Hota said.