Furloughs, Chennai floods may hit IT margins

Furloughs, Chennai floods may hit IT margins

 US furloughs, along with the Chennai floods, may act as a dampener for information technology (IT) companies with margins likely to be hit in the third quarter of the     current fiscal.

Furloughs refer to a temporary leave of some employees due to special needs of a company. US remains the top geography in terms of business for Indian IT companies.

“Q3FY16, a seasonally weak quarter due to furloughs (extent of which to be precisely known by mid-December), is expected to be further impacted by Chennai floods. While the accurate revenue impact of furloughs and floods is hard to ascertain and will be known only closer to quarter-end, prima facie we estimate it in the 10–70 basis points range,” brokerage firm Edelweiss told in a note.

While the floods will definitely impact billing of large-cap IT companies, we believe a few factors like client response to the natural calamity, structure of contracts, and alternate measures in place in the eventuality of a calamity can restrict losses to some extent. Generally, in such situations clients are accommodative, especially in the light of long established relationships, Edelweiss added.

Chennai huge in IT delivery

According to the report, TCS has 50,000 employees in Chennai, HCL Tech has 35,000, Infosys has 25,000, and Tech Mahindra has 3,500 employees.  According to Spark Capital, Chennai is a huge delivery centre for all major IT companies, with around 25–30 per cent of the total sector workforce based out of the city with Cognizant, TCS, Polaris, Hexaware, and Infosys leading the list.

An email query sent to TCS regarding its workforce in Chennai and impact on margins in the third quarter remained unanswered till the time of going to press.

J.P. Morgan believes that signals are pointing towards furloughs on the BFS sector, which certainly is not a good sign. “Specifically for the December 2015 quarter, the soundbites don’t appear too encouraging with multiple players alluding to the normal December quarter furloughs increasingly extending beyond the traditional telcos/high-tech/manufacturing segments to touch the services segments as well.

In fact, furloughs extending to the BFS sector in the December quarter have been cited by players. If that be the case, the impact would be noticeable given the dominance of the BFS segment for the sector. Our view is that some BFS clients may be resorting to furloughs as a cost-cutting exercise, especially if such clients have substantially spent their IT budgets leading up to the fourth quarter of the calendar year and may already have some visibility into budgets for the forthcoming year,” J.P. Morgan said.

Spark Capital, however, believes that the Chennai floods are unlikely to have much of an impact on IT companies. “We don’t expect any major impact on tier-I IT companies, given their size and scale of operations. As employees have been temporarily relocated to other offices in Bengaluru and Hyderabad, we don't expect any major loss of manhours on account of floods for Q3FY15. As far as tier-II IT companies are concerned, we also don’t expect any major loss as companies are more likely expected to work over the next three Saturdays of the month to recover any manhours lost due to floods in Chennai city,” Spark Capital said in its recent note.

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