Infosys explains drop in margins

Bangalore-based IT services provider Infosys announced full-year results last night with margins that disappointed analysts.

The group also forecast tepid sales growth for the year ending March 2012.
The company, which has traditionally seen the highest operating margins of all the Indian players, projected operating margins for fiscal year 2012 at 26 per cent, three per cent down on the previous year.

BG Srinivas, senior vice president and member of the executive council at Infosys, explained that the reduced operating margins were the result of the company trying to grow and move into new areas.

The company plans to take on 45,000 new staff and will see utilisation – that is the number of employed staff working at any one time – drop from 78 to 75 per cent. This is because the company plans to go for bigger jobs than it has in the past, which means it needs a bigger workforce, some of whom will be relatively idle until the new work comes in.

In addition, the rupee has appreciated against the dollar, which means a further drop in Infosys's margins.

Finally, the company has seen an increase in wages, which when taking on so many new staff will have a considerable impact.

But Srinivas explained that the wage increase would be normalised in the medium term: "There will be a compensation review period of three years in which wages will not rise and so the impact that wage rises have had on our margins will be offset."

Gartner analyst Sandra Norardonato concurred with Srinivas: "The company appeared to be transparent in its earnings, and the narrowing of margins is explainable using these three factors.

"In addition, the drop in margins is company specific and cannot be extrapolated to the industry. This does not reflect international sentiment regarding outsourcing," she said