![Asla – Watan Sahi [Official MV] Latest Punjabi Song – K Million Music](https://i.ytimg.com/vi/sCuLojys0n4/maxresdefault.jpg "Asla – Watan Sahi [Official MV] Latest Punjabi Song – K Million Music")
Margins for top Indian IT firms, excluding TCS, hit the lowest in three years during FY24.
As economic troubles starting with the war in Ukraine spelled trouble for Western markets like Europe, firms have largely been reporting declining margins in every financial year. The risk of recession in the 2024 fiscal along with necessary investments into generative AI further dampened operating margins for top IT firms like HCL Tech, Wipro, and Infosys.
- Also read: TCS, Infosys, Wipro and HCL Tech: Why Accenture sets the tone for IT stocks from here
Tata Consultancy Services was the only firm to buck that trend in this financial year, reaching back to the historically comfortable range of 26-28 per cent that it enjoyed before the pandemic, in the closing quarter of the 2024 fiscal. However, in an interview with businessline, TCS CFO Samir Sheksaria indicated that India’s largest IT firm might not be able to maintain its 26 per cent margin in the first half of FY25.
Prioritizing investments into generative AI has been at the forefront for every Indian IT firm but it is coming at a cost. Even as IT firms continue to implement cost optimization measures such as hiring freeze, reduction in subcontractor costs and even layoffs.
Sanchit Vir Gogia, Chief Analyst and Founder of Greyhound Research explained to businessline, “Given the macroeconomic uncertainty, business cycles are much behind the investment cycles for IT companies. With technologies like AI and IOT needed for future growth, IT firms have to continue to make these investments, even as digital transformation projects continue to be delayed.” Gogia believes that for the most part, IT firms will not be able to improve margins significantly in the next financial year as well – even though management commentary for the closing quarter of FY24 has posited some optimism for the 2025 fiscal.
TCS was the only IT company that was able to buck the trend. TCS started the 2024 fiscal with an operating margin of 23.2 per cent (Q1FY24) posting significant gains each quarter to end at a 26 per cent operating margin in Q4FY24.
- Also read: Wipro: Becomes a ‘show me’ story, again!
Infosys started the year with a 20.8 per cent operating margin (Q1FY24) and ended with 20.1 per cent in Q4FY24. Wipro was only able to increase its margins by 40 basis points over the course of the year from 16 per cent in Q1FY24 to 16.4 per cent in Q4FY24. HCL Tech, which was indicating recovery in margins in FY24 peaking at an operating margin of 19.8 per cent in the third quarter, was only able to improve its margins by 0.6 per cent between Q1FY24 to Q4FY24, ending the financial year at an operating margin of 17.6 per cent. All four IT firms found that their overall operating margins for FY24 were the lowest they have been in the last 3 fiscal years.
Naturally, the shift from digital transformation deals to optimisation deals has made a significant impact on margins. Pareekh Jain, and IT analyst explained, “optimization deals generally do not have a large headroom for profits and they also require larger labor costs. For most IT firms besides TCS, this means that subcontractor costs have also risen as a result, further impacting the margins. Investments into generative AI are further squeezing margins and TCS is the only firm with the necessary scale to not be affected by these costs.”
Gogia said that even though firms like Infosys and HCL are seeing limited growth in margins, the investor community is not necessarily too concerned. “These are necessary investments that will deliver growth in 5-7 years,” said Gogia. “Large-scale AI deals will start to come in FY26 and FY27. In this context, the current margins for IT companies are healthy even if they are being squeezed at the moment,” he added.
