Attrition, wage hikes to dent margins of IT firms

BENGALURU:  India’s tier -1 and mid-cap IT service providers are likely to post strong revenue growth in constant currency terms for the June quarter of FY22 despite the Covid second wave hitting the businesses worldwide. However, talent crunch and two cycles of pay hikes for top firms are likely to hit their operating margins. 

Top brokerages and analysts say that companies including Infosys, HCL Tech, Tech Mahindra may revise their revenue guidance for the rest of the financial year with strong double-digit revenue growth compared to previous year when the pandemic caused disruption during the corresponding period. 

Crisil ratings said that its analysis of top 18 IT firms revealed that the leading industry players have been able to maintain a healthy balance sheet with cash surpluses of almost Rs 1.5 lakh crore at March 31, 2021. Largest IT services firm Tata Consultancy Services (TCS) which will announce its results on Thursday, according to Kotak Institutional Equities, is expected to post a 5% revenue growth sequentially for the quarter, although the brokerage has placed its bets on peers, Infosys and Wipro, among large firms.

“We expect Infosys to lead the growth in tier-1 IT companies with sequential growth rate of 4.5%, followed by TCS (3.7% in constant currency), and Wipro (3.1% on an organic basis, 9.4% including Capco and Eximius Design acquisitions),” Kotak said in a note. Deal conversions, digital offerings, improved demand climate, cost-cutting undertaken by both large and mid-size IT firms have led to optimism on the street for the industry overall.

The mid-cap firms like TechM, Mindtree, L&T Infotech are expected to post industry leading robust revenue-growth. Mindtree’s shares especially have gained 159.6% over the last one year beating the industry leaders as well as the Nifty IT index. During an analysts call last month, Mindtree’s top management said that it has clocked record deals during the pandemic with little to no impact of Covid’s second wave.

Kotak said that amongst the mid-tier IT service providers, Mindtree is likely to post a 6.8% q-o-q revenue growth followed by Mphasis (5% and L&T Infotech (3.5 %). Amongst the verticals, Banking Finance and insurance (BFSI), retail, manufacturing, lifesciences will likely drive the major revenue growth for players across the board. Attrition/ talent poaching to hit margins  Analysts say that the higher attrition rates seen in the industry during the last quarter as well cycles of salary hikes to retain talent is likely to impact the operating margins for all the companies. 

During Q4 of FY21, the attrition rates for companies like Infosys, Wipro, Cyient Technologies, Tech M peaked at 15.2%, 12.1%, 21% and 13%, respectively. ICICI Securities said that the company margins are expected to be impacted in the range  of 40-300 basis points due to wage hikes.

Tech talk

• Infosys, HCL and Tech Mahindra likely to revise their revenue guidance for the rest of the financial year with strong double-digit revenue growth
• Tata Consultancy Services is expected to post a 5% revenue growth
• Deal conversions, digital offerings, improved demand and cost-cutting boost optimism
• Mindtree likely to post a 6.8% q-o-q revenue growth followed by Mphasis (5%) and L&T Infotech (3.5 %)