Info-tech

Wage hikes, hiring costs set to weigh on IT firms’ margins in Q2

KV Kurmanath Hyderabad | Updated on October 05, 2021

Hiring across IT firms will continue to remain high   -  iStockphoto

But outlook for the fiscal remains strong with good deal pipelines, say analysts

Most IT companies will see a dip in margins in the second quarter of the current financial year due to pressure from wage hikes to arrest attrition and hiring costs to make up for the lost talent.

Analysts closely watching the sector are of the opinion that EBIT (earnings before interest and taxes) margins will be under pressure led by higher attrition and employee costs. The industry, however, will continue to witness strong demand and the growth outlook remains intact for the financial year.

“While skill specific cost has increased in the market, we expect companies to try to right size their pyramids in order to offset the increase,” according to market research firm Motilal Oswal.

“Hiring across IT firms (in our research purview) will continue to remain high as companies try to fulfil demand and backfill growing attrition, which will be a key focus area for investors,” it said in its earnings forecast for the second quarter.

Top ranking IT companies are better placed to absorb the supply pressure, given their capabilities with regard to training employees in newer skills.

The research firm, however, forecast a comfortable growth in profit after tax. “We expect our IT coverage universe to deliver a PAT growth of about 12 per cent year-on-year and 1 per cent quarter on quarter,” it said.

“Topline performance is expected to remain strong across our coverage, led by robust demand environment and deal wins,” it said.

Strong revenue growth

“For the current financial year, IT companies are expected to maintain strong revenue growth (4-60 per cent quarter-on-quarter in dollar terms) led by robust deal momentum in digital technologies,” Piyush Pandey, Lead Analyst - Institutional Equities, YES Securities, said.

The overall outlook remains robust as they are expected to report mid to high-teen revenue growth in the current financial year, with broadly stable margins,” he said.

Growing demand

Research firm Emkay Global expects healthy growth momentum to continue in the second quarter, riding on robust demand for cloud, data analytics, digital transformation and cyber security services.

It expects revenue growth of 4.2-6.5 per cent QoQ (in dollar terms) for tier-I companies.

“Mid-cap firms will continue to outperform, with growth in the range of 1.0-9.2 per cent (for the companies under the researches coverage universe,” it pointed out.

“Tier-II companies are likely to outperform tier-I companies on the back of healthy deal wins and pipeline. The shortage of skilled resources remains a key challenge in the short term,” it observed.

Published on October 04, 2021

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