Major IT companies have been experiencing a seasonally weak quarter, in line with the street’s predictions. For Q4 FY23, margins for the top three Indian IT firms — Tata Consultancy Services, Infosys and HCL Tech — reduced sequentially to 24.5 per cent, 21 per cent and 18.1 per cent, respectively. In the previous quarter, TCS, Infosys and HCL Tech had reported operating margins of 24.5 per cent, 21.5 per cent and 19.6 per cent, respectively. Margins for these IT companies took a beating in the concluding quarter of FY23, largely due to the banking crisis, which impacted the BFSI vertical for these companies.
The BFSI sector contributes to 30-38 per cent of the revenue mix for the top three Indian IT companies, according to a research report by ICICI Direct. Therefore, the banking crisis in the US impacted the margins significantly in Q4 FY23. The management commentary on the banking crisis illustrated that IT companies had to slow down execution of existing deals, as customer sentiments turned negative following collapse of Silicon Valley Bank and Credit Suisse crisis.
IT companies, which were seeing recovery in their margins in FY23, showing sequential growth in three consecutive quarters, concluded FY23 on a disappointing note, where margins declined in Q4 FY23.
TCS CFO, Samir Seksaria said: “On why we ended up here (at 24.5 per cent in Q4 FY23) and not at 25 per cent, that is not just because of just the higher onsite costs. It is also due to customer sentiments turning increasingly negative from where we started off at the beginning of the calendar year to what we saw in February and March. When discretionary projects are paused, that has an immediate impact on the revenues while we continue to incur the related costs in the short term. And that’s why we couldn’t exit at where we had targeted.”
FY24 deals
Seksaria further added that some macro uncertainiities plaguing TCS this quarter are likely to persist into FY24. However, executives continue to maintain that the deal pipeline is robust for FY24, and margins are going to see recovering in the next fiscal year.
“Our pipeline of large deals remains extremely strong, with increased focus on cost takeout programs. Operating margin guidance stands at 20 per cent to 22 per cent...As we look beyond FY24, we believe we have various levers to generate more efficiencies like improving utilisation, reducing subcons, improving pyramid apart from growth acceleration and potential pricing increases, which will enable us to aspire for higher margins over time,” said Nilanjan Roy, CFO, Infosys.