Chennai: Increased digital adoption and deal wins has helped the performance of the IT industry to bounce back in the July-September quarter. What has also benefited the margins of the top tier IT giants is the reduction of travel expenses of more than 70% year-on-year.
Travel costs at TCS, Wipro and Infosys — companies which declared their results by Friday —reduced by 65%, 72% and 75% year-on-year respectively in the quarter ended September. The development comes as companies switched to online calls for sales pitches and employees took to remote solving of problems. Despite this, TCS noted healthy deal wins worth around $8.6 billion, and Infosys saw $3.15 billion of large deal wins.
Cost savings-led margin growth has been a common factor across sectors during the pandemic and is expected to taper off as things return to near normalcy levels. Savings in travel costs have made a significant difference to the margins of IT firms in the July-September quarter. While this may not be sustainable for future quarters, IT outsourcers are getting less dependent on travel and more adept in virtual sales and delivery, analysts said.
“Travel expenses have reduced significantly for large Indian service providers like TCS, Infosys and Wipro — from 2-3.5% of revenue throughout 2019 to 0.8-0.9% over the last two quarters, contributing to margins,” Everest Group director Prashant Shukla said. While in the quarter ended June, service providers had to substitute travel expenses with WFH infrastructure, the full benefit of remote work passed through in the September-ended quarter margins, he added.
“During the 2008 crash, it (travel costs) made a huge difference to Indian heritage IT outsourcers and kickstarted the great growth years for the industry,” HFS Research founder and CEO Phil Fersht said. “Savings were 5-10% of revenue during 2008-09…I’ve seen as much as 10-15% of cost take out already (this time), and this may go higher as we adapt to our new virtual era,” he added.
Most industry trackers say margin benefits due to reduced travel costs will also fade away over time as restrictions are lifted, but the quantum of travel in the sector may not go back to pre-Covid levels either, they added. Analysts at Kotak wrote in a note that clients are increasingly comfortable with remote working, and “it is not difficult to imagine that clients would be receptive to higher level of location-agnostic delivery”.
“Once travel restrictions are lifted, this will start putting pressure on margins, especially because service providers will still maintain disproportionate WFH infrastructure owing to fear of a second wave, while travel expenses will add to cost,” Shukla said. For now, the IT giants have also passed on benefits of cost savings. TCS rolled out salary hikes from October 1, Infosys announced hikes from January, and Wipro said it will do it in December.