IT majors set to clock 1.4-4% QoQ growth; wage hike, attrition may hit margins: analysts

Our Bureau Bengaluru | Updated on July 05, 2021

The June quarter, which is considered seasonally strong, could see sequential revenue growth approaching pre-Covid levels for the domestic IT services companies. However, due to wage increases and high attrition margins are expected to take a hit.

Analysts expect tier-one companies such as Infosys and TCS to report 1.4-4.0 per cent (constant currency) QoQ growth. They also said that Covid second wave impact on delivery will be limited depending on delivery location and fungibility of the bench resources. However, unlike the previous quarters, there has been less news around ‘mega deals’ in Q1FY22 compared to Q4FY21, which could be a cause for concern, an analyst with Nirmal Bang pointed out.

ICICI Securities, in a note to investors, said wage hikes will be a key margin headwind. “Further, high utilisations, sharp spike in attrition after a lull, and bottlenecks related to campus hiring this time – should translate into supply-side cost pressures,” Sudheer Guntupalli and Hardik Sangani, analysts at ICICI Securities, said.

Pandemic impact

In an earlier note, the same analysts cautioned that while the rapidly evolving nature of the pandemic makes it difficult to quantify, any geographic de-risking by clients to other offshore delivery destinations (for example Philippines, Poland) may pose risks to the current outlook. Prima facie, companies with higher T&M (time and material) share may see bigger impact.

The analysts also said they expect the double-digit revenue growth outlook for most companies to remain stable largely aided by a favourable FY21 base. In the case of Infosys, the street is already ahead of the guided revenue growth band. “We expect Infosys to lead the growth in large caps at 3.9 per cent QoQ CC. This will be followed by TCS (+3.8 per cent QoQ CC) and Wipro (+3.4 per cent QoQ organic and 9 per cent QoQ, including the CAPCO acquisition), Motilal Oswal’s Mukal Gagr, Anmol Garg and Heenal Gada said.

But they also pointed out that margins for most IT companies are expected to decrease led by a second wage hike and an increase in attrition/hiring with wage hikes expected to be in the 100-350 bp range for large/mid-cap IT companies.

Revenue growth guidance

Prabhudas Lilladhar said it expects Infosys to upgrade revenue growth guidance to 14-16 per cent YoY CC from 12-14 per cent. “There is expected to be pressure on operating margins in 1Q because of increased levels of sub-contracting caused by strong demand, wage hikes, high attrition and investment in large deals.”

The analysts with ICICI Securities were quite clear that ‘Cloudification’ and ‘Digitalisation’ had almost become synonymous with Covid. Expectations of a material and permanent increase in growth/profitability of the industry factor-in aggressive assumptions around incremental magnetizability of these technologies and irreversible change in human behaviour.

“Prior hyper-disruptive events (example Spanish Flu, SARS, demonetisation) and current mobility trends present contrasting evidence. Covid can at best drive 150 basis growth acceleration over FY22-FY23. Current mobility trends indicate that as economies recover and public transportation resumes, activity in physical channels is already reverting towards pre-Covid levels,” Guntupalli and Sangani said.

Published on July 05, 2021

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