The large deals which IT firms like HCLTech and Infosys have recently bagged from companies like Verizon, State Farm, Liberty Global, and Danske Bank, respectively, are unlikely to be margin accretive for them. This is because a substantial number of employees of the firms concerned will be transferred to their rolls as part of the project, which are essentially rebadging deals. Since the employees are located across geographies, their average cost would be higher than the regular hires in India, analysts said.
The operating margins of TCS, Infosys, and HCLTech saw a sequential decline during the April-June quarter. To improve margins, IT firms are trying cost optimisation measures. What’s acting in their favour is that the attrition rates are falling, which will help them in reining wage cost. However, analysts maintain that taking on employees as part of rebadging deals will increase the number of on-site employees, which may lead to higher wage cost, thus impacting margins.
Taking on higher cost employees come at a time when the IT firms are trying to contain wage cost. For instance, Wipro and HCLTech, have deferred salary hikes for their employees from the second to the third quarter and Infosys has till date not given hikes. In fact, HCLTech has said that it will skip salary hikes for senior employees this financial year. Usually, IT firms give salary hikes during the second quarter of the fiscal.
While announcing its April-June quarter earnings, Infosys had sharply cut its revenue guidance for FY24 to 1.0-3.5% in constant currency terms from 4-7% announced earlier. It has, however, retained its operating margin guidance of 20-22% for the current fiscal.
Pareekh Jain, founder of Pareekh Consulting, said, “While such large deals are good for the industry, they may have to compromise on the margin fronth. According to Peter Bendor-Samuel, CEO, Everest group, rebadging often delay margins and carries risk, so margins are likely to be get hit. However, he added that rebadging deals are often linked to cost cutting initiatives, so more of such deals may come through in the days to come.
Ramkumar Ramamoorthy, partner, Catalincs, a growth advisory firm, said that such multi-year, rebadging, deals are likely to be margin dilutive in the first few years, but maybe over the longer term, the IT firms will manage margins reasonably well.