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While skill-specific cost has increased in the market, Motilal Oswal in a report said that it expects the IT companies to try to right size their pyramids in order to offset the increase in demand and cost. For IT companies, key monitorable in the Q3FY22 commentary will continue to be the medium to long term growth visibility, attrition, and pyramid impact of fresher onboarding, as per the brokerage and research firm.
“Hiring across our IT coverage will continue to remain high as companies try to fulfill demand and backfill growing attrition, which will be a key focus area for investors. The resurgence of COVID-19 cases remains another risk on the supply-side," it said in a note.
Meanwhile, the brokerage sees margins for most IT companies (excluding company-specific factors) to be in a narrow range as supply pressures like attrition and hiring are offset by operating leverage.
After a few quarters of accelerating attrition, there may be a stabilization in attrition for IT service providers, although at elevated levels. This should start reflecting first in qualitative commentary as most companies report LTM attrition.
On the other hand, sharing its stock recommendations, The brokerage said it prefers Tier I players over their Tier II counterparts, given their relative valuation attractiveness and tendency to narrow down the valuation differential over time. “Continuation of the strong sequential growth momentum and expectation of a qualitative commentary on growth beyond FY22 should help sustain the rally in IT stocks, despite their premium valuations."
While valuations remain elevated, Motilal is positive on a good demand environment and a sustainable double-digit topline growth in the medium term for IT companies, led by strength in demand, increased deals on a full-scale Digital transformation, upward price revisions, and higher spend on cloud migration by large corporates.
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