Indian IT companies headed for a rough future

Experts are predicting that the high profit margins experienced by the Indian IT companies will erode in the next 3-5 years.  And would settle at just around the 11-15% mark.

Within the next two years, experts predict that operating margins will fall to below 20% (the average is 25% now for Infosys, TCS, Wipro and HCL Tech) and settle at a level that just about takes it past single digits. For comparison, in the quarter to September, the average operating profit margin for corporate India was 14.5%.

“Over the next five years, profit margins of Indian IT firms could be 11-15%, similar to their global counterparts,” said Sid Pai, Asia-Pacific president at outsourcing advisory ISG Information Services Group, referring to rivals such as IBM and Accenture.

Increase competition, need to hire more employees in US and Europe to get past the visa restrictions, and pressure from the clients for better value will drive the Indian companies’ profitability down substantially.  One critical thing is that the Indian companies aren’t global yet and as they try to “become global” the process will hurt them badly.

The question is what are they doing to transform?  After all, IBM has transformed from the Hardware company to Services Company to now a strong Software company.  What has Infosys or TCS done in that time period?  Really no concrete transformation.

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