Margins of the top four IT companies fell by 100-200 bps in the opening quarter of fiscal 2023. Rising employee costs to stymie attrition, as well as the pressure from managing deal pricing in an increasingly unfavourable economic environment, have kept their margins under pressure for the past five-six quarters.
BusinessLine’s study of data from the past five quarters reveals that the drop in margins was sharper in Q1FY23. The IT majors remain silent about demand pressures ahead as the world heads towards a possible recession and budgets are expected to contract. According to their statements to investors, the margin decline is bottoming out, mostly driven by investment in expansion and cost of attrition. They agree that the poor innings in this quarter will likely be followed by a growth trajectory.
In an investor call, Wipro CEO, Thierry Delporte, said the margin decline has bottomed out, “Our Q1 operating margins, as anticipated, were lower at 15 per cent. This is because we’re investing in solutions and capabilities to strengthen our position as a strategic partner for our clients. But we’ve also accelerated structural transformation by investment in freshers and IT, that will help drive operational efficiency and agility. The inorganic bets we made to accelerate growth are currently diluting our margin by 2.3 per cent as a reference, and at 15 per cent, we believe we have bottomed out.” He said , “our endeavour would be to come back to the guided range that we spoke about before. However, we will calibrate it every quarter, we are not giving a time window or by when we will come back.”
Chief Financial Officer, TCS, Samir Seksaria, said the annualised increments given on April 1 majorly contributed to margin contraction. He noted , “Our target is we expect that it would be on an increasing trajectory. And that has been the usual trend, except for last year. Our target is that it should improve and we should get closer to what we exited in Q4.”
HCL Tech also noted that margin pressure was due to transition and talent costs. The CEO, C Vijaykumar, said they hope margins recover from Q2 of fiscal 2023. “ Q1 has been the lowest margin quarter across the last 2-3 years. I think that’s a trend that we will see. And whenever we have had a salary increase, we have offset the increased salary spend through optimisation, because if yousee the sequence, in April, the productivity step-downs happened, and some of the related cost-outs also happened at that time. And they really start showing more results in Q2, when the salary increase also hits. Generally, we’ve seen an improving trend from Q2 onwards, and we hope to see the same this year as well,” he said.