Even as attrition rates declined, margins saw no improvement for the IT firms in Q1. The top three majors — TCS, HCL Tech, and Wipro — saw margins fall on a QoQ basis as revenue growth slows down and wage hikes kick in. Analysts predict margins will be under stress for a couple more quarters.
IT major TCS saw its margins dip by 130 bps QoQ to 23.2 per cent due to seasonal wage hikes; Wipro’s margin was down 30 bps sequentially at 16 percent; and HCL Tech’s margin came in at 17 per cent, a dip of 110 bps QoQ. Improvement in the rate is not evident, despite the fact that margin headwinds like attrition and subcontractor charges that previously existed no longer present a problem.
‘Topline under pressure’
Sumit Pokharna, Research Analyst and Vice President, Kotak Securities Ltd said, “The top line is under pressure and operating leverage is going away, hence building the pressure on margins. Declining revenue growth and wage hikes are also adding to it.”
Although the decline in attrition and subcontractor costs could have provided some relief, the discretionary expenses, including travel, have set it off. Margin deterioration is also caused by pricing pressure since negotiations have become difficult in certain volumes due to a drop in volume, he added.
Omkar Tanksale, Research Analyst, Axis Securities, said, “Margins are under pressure due to higher on-site expenses, in dollar terms, and wage hikes. The expenses being made for the payments are on the higher side. Amidst the tough demand environment, the comfort from cross-currency tailwinds too is not to be seen as currency rates are now stabilising.”
Gloomy year ahead
Going ahead, companies have given a cautious outlook on margin improvement and remain watchful. Samir Seksaria, Chief Financial Officer, TCS, said on an investor call, “We take increment, the biggest headwind up front. We then typically claw back the margins through the rest of the year. With the current macro uncertainties, it would be difficult to estimate how exactly the margin recovery will play out quarter on quarter. But our focus would be to incrementally get closer to our aspirational band.”
Although Wipro did not indicate improvement in margins, it expects to maintain the current rate. “There are internal steps that can be taken to offset some of the impacts of wage hikes or any other cost increase. One such is clearly the utilisation, which has improved from the previous quarter, and it will continue to find more success as we move forward. And automation that we can deploy in our fixed-price projects,” said Jatin Dalal, Chief Financial Officer.
In what looks to be a gloomy year for the IT industry, margin pressures will also persist. Analysts expect margins to be under stress at least for the next two quarters, if not the entire fiscal year.