IT Firms will see their EBITDA margins plunge below 20% over the next 3 years
TOP Indian tech firms such as TCS, Wipro, Satyam and HCL will see their EBITDA margins, a measure of operating profit, plunge below 20% over the next three years, as these companies move more information technology projects to India, and align their operations with rising wages apart from the currency fluctuations. Leading outsourcing customers such as General Electric, Royal Bank of Scotland and Bank of America plan to increase their offshore outsourcing in order to lower their cost of managing IT in the US and UK, where billing rates are more than twice of what can be achieved by sending work to offshore locations such as India. “It’s going to be growth vs margin dilemma for us — till now, we have protected our margins and fared better than the likes of IBM and EDS,” said a senior executive at a leading Indian tech firm who requested anonymity. “However, in the long run, I would say that even 15% of EBITDA will stand much better than our rivals who hardly achieve 10%,” he added. EBITDA (short for earnings before interest, taxes, depreciation and amortization ) margins, reflect a firm’s profitability. While HCL Technologies is expected to see its EBITDA decline by half from 22.2% in 2008 to 11.2% in 2011, country’s biggest software company TCS could see its margins go down from around 26% last year to 18.2% over next three years, according to Anand Rathi Research. Country’s third biggest tech firm Wipro is also expected to see its EBITDA decline from around 20.1% last year to 13.5% by 2011, the brokerage firm said. (see table). Barring Infosys, the top four Indian software firms will see their EBITDA margins go below 20% over the next three years, the report added. Infosys is expected to see its EBITDA decline from 31.4% to 23.6% by 2011. This sharp decline in margins can also be attributed to the currency fluctuations. A large proportion of Indian tech firms’ costs are rupeedenominated, and at a time when the revenue growth (primarily in US Dollar) is expected to be lower, their rupee costs will not see any significant decline. Moreover, the rising wage costs are also expected to impact the margins. In their November report, Anand Rathi analysts Tarun Sisodia and Naushil Shah said that while revenues for the top tech firms will grow at 15% during next three years, “the impact on EBITDA is expected to be more severe—just 2% growth.” “The fall in EBITDA growth is far worse (23% to 2%) as the cost base does not change much, while the revenuedrop-led profit-drop is significant,” Mr Sisodia and Mr Shah added in the report. As India’s tech biggies deliver more IT projects from the country, they will have to manage with billing rates of anywhere between $18 to $27 per man hour. In comparison, a typical application development and maintenance project executed in countries such as US and UK will command hourly rates in excess of $60. Meanwhile, country’s second biggest software exporter, Infosys continues to protect its margins. “Margin is a function of how efficiently you run a company,” Infosys chief executive S Gopalakrishnan told ET in an interview on Monday. “We have chosen a profitable growth and have balanced our portfolio by using multiple levers such as fixed price contracts,” he added. Cognizant, which maintains its operating margins in the range of 19-20% even at a time when Indian offshore rivals are trying to protect their 20-30% margins, says it follows a different model. “Cognizant has consciously maintained its operating margins in the 19 to 20% range (non-GAAP) and reinvested anything in excess of it back into the business for industry-leading revenue growth,” a company spokesperson said. “This lower operating margin, compared to its top-tier offshore competitors, is also reflected in its higher SG&A (Selling, General and Administrative) which is in the 23 to 25% range
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