As economic headwinds mount, top IT companies are expected to report margin pressures in the second quarter, predict analysts.

During the April-June quarter, despite steady business, IT majors reported rising pressure on margins which fell by 100-200 basis points during the first quarter of 2023 fiscal. This trend continues as inflationary pressures and attrition rates continue to advance. The weakening macro environment and supply-side pressure of attrition of top IT talent will mute margin improvement.

A report by Motilal Oswal explained, “Growth (in the IT sector), should be aided by seasonal margin improvement, although the impact is muted due to continued supply side pressure.”

Attrition levels

Therefore, even though seasonally the second quarter is considered to be a strong quarter, there is a moderate decrease in the demand for technology services. Any growth in margins will be moderated by the widely reported talent attrition seen in IT companies. “Attrition levels are expected to remain at elevated and supply will continue to stay constrained, leading to increased replacement costs.”

Sectors such as Retail and Manufacturing are affected presently as per the report. “Though slow-down in the US and Europe and a highly inflationary environment will impact 2HFY23 and FY24, on the longer term, demand would remain intact,” noted the Oswal report.

Resilient performance

Another report by HDFC Securities notes that IT companies will post a resilient performance, despite the worsening macro conditions in the US and European markets. “The IT sector is expected to post resilient Q2 performance in context of the current macro environment. Tier-1 IT is expected to deliver sequential growth in the range of 2.4 per cent to 4 per cent CC. Cross currency impact severity will be similar to last quarter with -1.3 per cent to -1.8 per cent sequential impact for Tier-1.” 

“Infosys is likely to maintain its 14-16 per cent CC guidance for FY23E and HCL Tech is expected to maintain its 12-14 per cent growth guidance for FY23E. Wipro’s Q3 growth guidance is likely to be 1-3 per cent CC QoQ and LTTS is expected to retain its 14.5-16.5 per cent CC growth for FY23E,” said the HDFC report.

Economic slowdown

IT companies have been reporting margin pressures in the lead up to the economic slowdown in the US and Europe. Recently, the rising talent costs from attrition in the IT sector culminated in the moonlighting debate, where to IT companies such as Wipro fired 300 employees for moonlighting, this reducing operational efficiencies for the firm. 

Tata Consultancy Services will be kickstarting the earnings season on October 10