Indian IT firms including TCS, Infosys, Wipro and others are expected to take a hit on margins in the upcoming quarterly results cycle, mainly owing to higher employee costs, analysts said. “Continued supply-side challenges around high attrition, higher-than-usual hikes for offshore employees and some resumption of discretionary spends like travel would weigh on margins in 4QFY22F,” said global brokerage firm Nomura in a report. Domestic brokerage ICICI Direct also shared similar views in its quarterly forecast for IT sector stocks. However, analysts remain confident in the demand front for IT sector firms. The Nifty IT index is down 9.1% so far this year, underperforming the benchmark Nifty 50.
Margin hit incoming
The demand side has been robust for IT firms, having witnessed strong tailwinds in recent years. This demand for IT services has led to large hiring in the sector. “We expect margins to contract on-quarter despite the industry continuing to add record freshers. The attrition across companies would continue to be high and, hence, cost to backfill attrition (at higher costs) and costs related to retention, bonus, rationalisation of compensations are expected to put pressure on margins,” ICICI Direct said in a note. All IT companies, except Coforge, are expected to report a decline in EBIT margins sequentially in the range of 20-80 bps. Other supply-side challenges that could weigh on margins include high attrition, higher-than-usual hikes for offshore employees, and some resumption of discretionary spending like travel.
Outlook still strong
The robust demand outlook for the sector remains intact. “We believe headwinds like high inflation in developed markets forcing higher-than-usual salary hikes for onsite employees, resumption of travel and higher visa costs would only be partly negated by tailwinds like improved pricing and currency depreciation,” said Nomura. While growth may moderate, HDFC Securities noted that fourth-quarter revenue growth of 2.6% QoQ and 16.6% on-year remains well above the 10-year average of 1/7% on-quarter and 8.2% on-year.
TCS
Nomura expects TCS will see 14% on-year growth in revenue and predicts EBIT margins to remain flat on-quarter basis. ICICI Direct said that TCS is anticipated o register growth led by continued improvement in demand from BFSI, healthcare and retail, acceleration in digital technologies, and ramp-up of deals. HDFC Securities has pinned a profit projection of Rs 100.31 billion.
Infosys
EBIT margins for the company may dip 35 basis points when compared to the previous quarter, said Nomura. The company has seen momentum in financial services, retail, communication, energy, and manufacturing sectors. ICICI Direct is expecting a net profit improvement of 1.9% on-quarter while HDFC Securities said it may improve by 0.8% to Rs 58.55 billion.
Wipro
Wipro had guided for 2-4% constant currency growth in the January-March quarter for IT services. “We expect the company to report 3.5% QoQ CC growth in revenues in IT services,” ICICI Direct said. EBIT margin may dip 30 basis points from the previous quarter. Sequentially, net profit is expected to be flattish.
HCL Technologies
Analysts at ICICI Direct said that HCL Technologies’ revenues will be partially offset by a cross-currency impact of 30 bps. EBIT margins for the quarter are expected to contract 80 bps on-quarter, due to negative operating leverage and continued salary rationalisation amid high attrition. HDFC Securities believes profits could take a hit by 5.6% on-quarter basis to Rs 32.49 billion.
Tech Mahindra
Tech Mahindra is pegged by ICICI Direct to see 5% quarter-on-quarter growth in CC revenues but profits may move lower. “PAT is expected to decline 1% QoQ due to subdued operating performance,” they said. HDFC Securities also expects a 0.4% drop in profits for Tech Mahindra.
Top stock picks:
Nomura – Infosys and Wipro (in large-caps) and Persistent (in mid-caps)
ICICI Direct – Infosys, LTI, and Coforge
HDFC Securities – Prefer Infosys in tier-1 IT and Persistent and Mphasis in the mid-tier IT space.