Indian IT Companies – Indian IT companies can earn more by selling third party items

Indian IT companies are increasingly partnering with third-party vendors to increase their revenue. Although most of them have a transfer income component, analysts expect that major companies such as TCS, infosys and Birlasoft to announce higher earnings carried forward into the quarterly earnings season that begins next week.

Pass-through revenue is revenue generated from third-party services and products, which is passed directly to customers without any margin.

For Infosys, institutional equity analysts at Kotak said they expect marginally higher revenue in the second quarter from the sale of third-party software. His note said investors can focus on five elements, one of which will be income from the sale of third party articles.

Similarly, Nomura analysts wrote in a note that they expect TCS to get a higher revenue contribution from BSNL (which has a pass-through component), which will likely limit margin expansion to 20 bps quarter-on-quarter.At Birlasoft, they wrote: “We expect BSOFT’s EBITDA (earnings before tax, depreciation and amortisation) margin to fall from 15.8% in FY24 to 12.4% in FY25F, driven by tough competition in a low growth environment; continued investment in team and capability development with slower revenue growth; and greater transfer income.”

In addition to limiting an IT company’s margin expansion plan, indirect revenue significantly increases revenue per employee without actually seeing a positive improvement in employee productivity, analysts said.

They said per capita revenue growth without simultaneous margin growth shows that IT companies have mainly relied on large deals, which are loaded with packaged services that include the sale of third-party products with lower margins.

Peter Bendor-Samuel, chief executive of Everest Group, a consulting and research firm, said an increase in revenue generated from the sale of (third-party) software and cloud helped “revenue per employee,” but did not help to the margins (this is affected by accounting treatment).

HSBC, in a recent note, said that most large companies saw their RPH (revenue per capita) increase, but that was mainly due to the increase in utilization, transferred revenue and the outsourcing rate.

On the irony of revenue per employee increasing without a change in margin, Peter said significant wage inflation during and after Covid increased the price (rate sheet) of services, which boosted revenue per employee but not margin increased.