In a rare instance, India’s biggest IT firms, Tata Consultancy Services (TCS), Infosys, Wipro and HCL Technologies, have all posted a sequential drop in net profit in the April-June quarter, given the multiple headwinds facing the sector. While TCS reported the sharpest sequential drop in net profit at 10%, Wipro saw a drop of 8.1%, Infosys fell 3.3% and HCL declined 6.6% during the first quarter of FY18, as the demand environment continued to remain subdued. Only Tech Mahindra bucked the trend, improving its net profit by 36% on a quarter on quarter basis.
The $150 billion plus Indian IT industry faced with the prospect of a single digit growth rate in the range of 7-8% for FY18 has been staring at tepid demand in business coupled with the added pressure of an appreciating rupee given the export focus of the sector. Added to this, the industry has not been able to make any significant changes in its cost structure.V Balakrishnan, former Board member and CFO, Infosys attributed four factors for this decline in net profit. The wage increases have hit margins with majority of the companies going in a salary hike in single digits. The revenue productivity per employee has not gone up – which is one of the biggest lever for profits – due to the slowing demand.
Given this environment, IT companies have employed various measures to shore up their profitability. These top tier companies have increased their utilisation level on an average to over 80% and expect to retain it in this range in the coming quarters. This would in fact mean, lesser number of people would be hired during the fiscal. According to Wipro CFO Jatin Dalal, the company has multiple levers to maintain its margins which include automation tools, increasing utilisation and pricing in digital projects to some extent.
Given this backdrop, there is also a realisation that the margins will be difficult to maintain. For example, Infosys which gave a margin band in the range of 24-25% for FY17 has now expanded it to 23% to 25% for FY18.