The Q2 earnings reports for Syntel and TCS show not only a strong performance for both companies but, surprisingly, show stronger earnings growth than revenue growth. We’ve seen stronger earnings than revenue results with other providers in the past, but this is surprising. That’s because it reverses a trend the industry has been experiencing.
This strong performance comes at the same time we’re seeing a rupee appreciation, which puts a slight downward pressure on margins and reduces Indian providers’ ability to make money.
But as we dig below the surface for deeper significance, the strong earnings indicate that the industry is maintaining pricing. Amidst competitive pressures, providers are successfully resisting significant price discounting on new work, despite well-documented attempts by procurement organizations to drag pricing down. So the Syntel and TCS earnings reverse a trend of increased pressures on margins.
I think this is a result of further honing their offshore model and flattening their labor pyramid. It’s particularly impressive given that we’ve had modest rupee appreciation during this time frame.
The news is encouraging and bodes well for the industry, particularly given the modest uptick we see in the recovery of the global and North American economies.
