With IT companies set to come out with their first-quarter results this week, analysts predict a modest sequential revenue growth, in the range of 3-4 per cent. Margins, however, are expected to remain under pressure, due to wage hikes and continued supply side pressure as attrition levels are still elevated.

The earnings season follows a rocky quarter marked by concerns over the Russia-Ukraine war, rising inflation, supply-chain disruptions and unsteady financial markets. Stock prices of IT firms saw major corrections last quarter — Infosys down by 20.80 per cent; TCS down 10.73 per cent; Wipro down 27.74 per cent; Tech Mahindra down 30.72 per cent — in contrast to the benchmark index’s (Nifty 50) 8.54 per cent decline. The Nifty IT index, too, nosedived 20.40 per cent.

Continued IT spending

Motilal Oswal expects modest median revenue growth of 3.3 per cent q-o-q in constant currency (CC) terms and 14.3 per cent year-on-year (y-o-y). Similarly, research firm Emkay Global expects a 2.6 per cent to 4 per cent q-o-q revenue growth in CC terms for tier-1 IT services companies and 2.8 per cent to 11.5 per cent growth for tier-2 firms.

Analysts believe the growth will be sustained by continued IT spending. “Even though some enterprises would reduce their IT spending due to macroeconomic factors, spending in areas such as maintenance, cloud, outsourcing and others, is expected to continue, thus driving the growth of IT service providers,” Harish Krishnakumar, Senior Market Analyst, IDC India, told Businessline.

Wage hikes, attrition

Market watchers expect EBIT margins to remain under pressure due to wage hikes and continued supply side pressure. Motilal Oswal expects tier-1 companies to operate in the negative 80 bps to negative 190 bps range, with the exception of HCL Technologies. The tier-2 pack will operate in a wider range of negative 30 bps to negative 290 bps. Further Emkay Global said benefits from rupee depreciation will be marginal due to cross-currency headwinds.

The deal intake is expected to remain healthy across companies, with an uptick in smaller deals, led by clients’ urgency to execute digital transformation deals quickly. “The momentum will be driven by increased demand for cloud adoption, digital transformation and customer experience transformation deals,” Emkay Global said in a report.

“Higher attrition rates are expected to continue and are likely to cool down by the end of 2022,” said Krishnakumar.

The demand environment may get affected in the short term. “While the long-term demand environment remains unaltered, we anticipate an impact in H2 (second half) FY23 and FY24 due to elevated inflation and an economic slowdown in both the US and Europe,” Motilal Oswal said in a report.

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