Large deal wins may not dilute operating margins

Bengaluru: Large deals bagged by the IT firms in recent months will not have negative impact on operating margin in the short-term as companies have the scope of executing these contracts through more automation.

Earlier, many analysts have feared that winning several large outsourcing contracts may dilute operating margin in the near-term as companies have to invest upfront. However, management of IT firms are confident that Indian IT firms have retained their margin profile in past years despite such large and mega deals on earlier occasions.

“When we set out the large deal strategy more than five years back, we were close to about 21 per cent margins. We have signed probably $50 billion-plus in large deals and today we are 21.2 per cent. So, we have not seen any margin erosion because of the large deal strategy. We recognize overall the periods and this experience that we had. We will sign on these large deals,” said Nilanjan Roy, Chief Financial Officer, Infosys, said during analyst call.

“Of course, up front they will have margin pressures, and from a portfolio perspective, we have the experience to say how we can improve the margin of the deal from day one versus, say, in year five,” Roy added.

During the second quarter ended September, the top four IT services firms reported healthy deal pipeline despite reporting subdued growth outlook for the current financial year. Market leader Tata Consultancy Services (TCS) had a total order book of $11.2 billion in the second quarter as many cost takeout deals got bagged by the company. Infosys bagged its highest ever large deal worth $7.7 billion during the second quarter out of which 48 per cent was net new. Deal pipeline of Wipro remained robust as it won deals worth $3.8 billion, up by six per cent YoY, while its large deal bookings were $1.3 billion, up by 79 per cent YoY. Cognizant, which reported its quarterly results on Thursday, also posted healthy improvement in its margin.

However, analysts pointed out that such large deals may not be margin dilutive, but material portion of these deals remain low owing to vendor consolidation. “Another factor is that a material portion of these deals are vendor consolidation, and not new scope. When taken as a whole, firms often lose as much as they gain,” Peter BendorSamuel, CEO of global consultancy firm, Everest Group, has told Bizz Buzz.