Pandemic boosts profit margin of IT companies as travel expenses fall by over 70%

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New Delhi: Most of the IT companies that have reported their earnings for the July-September quarter have shown improvement in their performance amid increased adoption of digital technology by companies owing to outbreak of Covid-19 pandemic. What has also aided their profit margin is lesser travel expenses. According to a report in the Times of India, large IT companies have witnessed more than 70% annual reduction in their travel expenses in the July-September quarter.

Travel costs at TCS, Wipro and Infosys — companies which declared their results by Friday —reduced by 65%, 72% and 75% respectively annually 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.

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 say.

“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,” the publication quoted Everest Group director Prashant Shukla as saying. 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 told the daily. “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.

However, industry watchers say this cost benefit will will reduce going forward as restrictions on travel is lifted gradually. But the quantum of travel in the sector may not go back to pre-Covid levels anytime soon, 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.