Profit margins of IT companies must be under pressure for January-March quarter due to record hiring and salary hikes

• Earnings season will begin next week with the results of major IT companies -- TCS on April 11 and Infosys on April 13.
• Digital transformation deals continue to boost IT sector’s growth along with rupee depreciation in the recent months benefiting the sector.
• However, profit margins of these companies are expected to be under pressure because of increase in employee salaries and record hiring.

The March quarter earnings season will begin next week with the results of major information technology (IT) companies such as Tata Consultancy Services (TCS) on April 11 and Infosys on April 13.

Most analysts believe March is a seasonally weak quarter for IT companies and they expect moderate earnings growth amid margin pressures.

The profit margins of IT companies are expected to be under pressure because of increase in employee salaries and record hiring.

“Sequential growth for Indian IT will be moderate in March 2022 quarter and in line with historical seasonal trends. Margins will remain under pressure resulting from elevated wage increases, onsite as well as offshore,” said Kotak Institutional Equities.

The entire IT sector is struggling to retain employees including top five companies. In fact, in the last quarter more employees left Tech Mahindra than at TCS and Wipro.

The report added that talent shortage continues even as the industry has added a record number of freshers. High cost to backfill attrition and retain talent will seep into margins across companies.
Source: Emkay Research*Revenue growth in constant currency on a sequential basis

Meanwhile, the growth momentum may sustain due to healthy broad-based demand as firms across the world have increased spending on new technologies. “The demand environment is robust at present. There could be moderate risk to demand as fallout of the Russia-Ukraine imbroglio starts impacting key economies. Nonetheless, we believe double-digit growth is feasible for many,” said a report by Kotak Institutional Equities.

Higher employee cost and shortage of skilled talent will remain the key challenges in the short term for IT companies.

Investors will keenly monitor the management commentary on any impact on technology spending from higher energy prices, inflation and potential economic slowdown, demand trends in key verticals such as banking, financial services and insurance (BFSI), retail, manufacturing and communications, and the attrition rates.


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