IT cos set to see fall in offshore revenues

Bengaluru: Indian IT services companies may see fall in the share of offshoring revenues in the next financial year as employees start operating from offices and travel resumes. According to company officials and industry experts, operating margins of Indian IT firms are likely to face pressure owing to these trends in coming quarters. In the last two years, domestic IT services companies have seen decent rise in the offshoring revenues, supporting the operating margin levels. Infosys' offshore effort mix (projects implemented from India) went up to 76.2 per cent by the end of December quarter, a rise of 140 basis points (bps) over the same period of previous year.

Bengaluru-headquartered IT major Wipro has seen offshore revenues going up by 240 basis points to 56.3 per cent by the end of Q3 of FY22.

Not only large IT firms, but also leading mid-tier IT companies have also benefitted from rising offshoring during this pandemic. L&T Infotech has seen its offshore effort mix rising to 84 per cent in Q3 of FY22 from 80.9 per cent in FY21. Another mid-tier firm, Mindtree's offshore effort mix went up to 86 per cent in Q3 of FY22 from 82.8 per cent a year earlier.

As more projects got implemented from offshore locations like India, it has supported the overall revenue in recent quarters. Earlier, CLSA said in a note that higher offshoring revenue, improved utilization and stable travel costs were the primary reasons for improvement in operating margins.

However, some industry players also pointed out that as travel resumes, some of these factors will lend less support to margins. In a recent interaction with Bizz Buzz, the Happiest Minds Technologies' management said that offshore-onsite mix, travel and utilisation would be key factors affecting operating margins in coming quarters.

Many also feel that the industry has seen a structural shift in terms of outsourcing and share of offshore revenues would be higher than the pre-pandemic period in coming years.

"In the long run, Covid had a huge impact on demand, and the entire ability for the supply side to be delivered in a remote environment is a shine-out because that has opened up the eyes of many of our clients that every sort of work doesn't have to be done nearshore. It can be done offshore. And I think, the beauty of that is, secularly, we believe this will help the industry in a much more larger offshoring at an overall level. And of course, part of that benefit will be more shifting to offshore locations," Nilanjan Roy, Chief Financial Officer, Infosys, said during the analyst call.