BQEdge | Yes Bank Stock’s Search For A Bottom And Will Infosys Share TCS’ Pain?

Will Infosys Hurt For Same Reasons As TCS?

The street was expecting Tata Consultancy Services Ltd. to report a 26.6 percent profit margin, mostly on account of favourable currency tailwinds. But India’s largest software exporter disappointed with a 90 basis point sequential contraction in the margin to 25.6 percent. Here’s why the same could happen to Infosys that reports earnings later today.

TCS’ margin fall was mostly due to cross currency headwinds. The company’s chief financial officer said that even though on average, the rupee fell 2.7 percent against the U.S. dollar in the quarter, the appreciation of other currencies against the U.S. dollar hurt profit.

Employee costs have risen too even though net employee addition for Q3 at over 6,800 was less than the addition of nearly 10,300 in the September quarter. The focus on onsite operations and hence hiring has added to expenses. Add to the stiffening competition from client-owned captive centres offshore.

Infosys has already witnessed this in the second quarter. Higher compensations and subcontractor costs contributed to a 150 basis point cut in last quarter’s gross margin. But that was offset by an 80-point benefit from favourable currency movements. For the third quarter, the consensus view is a not-more-than 20 basis point sequential contraction in the margin to 23.5 percent

If Infosys faces nearly the same currency headwinds as TCS but the disadvantage of higher offshore hiring costs and onshore subcontractor costs sustain in Q3, can the contraction in its margins be deeper than consensus expectations?