Top Indian IT services companies are likely to see an expansion in their EBIT margins over FY23-26 on the back of normalisation of employee attrition and various other levers, according to analysts.
The sector has seen a margin erosion over FY21-23 due to “high employee costs as a result of decadal high attrition”, analysts at ICICI Securities said. Margin pressure was a serious concern in the past few quarters, which is now likely to ease.
Going forward, margins will expand for the sector, driven by normalisation in attrition resulting in lower employee costs as percentage of sales as well as lower subcontracting costs as companies deploy their own employees instead of higher-cost third-party consultants.
Margins will also be driven by higher utilisation of employees with the large number of fresh graduates hired over the last 12-18 months starting to get billed, an ICICI Securities report said. The sector will also see an “increase in pricing, particularly for fixed-price projects when they come up for renewal, as per COLA (Cost of Living Adjustment) clauses in the IT contracts”, the report stated.
During Q3, most Tier-1 IT services companies saw a margin expansion on a sequential basis. TCS’s operating margins expanded 50 basis points sequentially to 24.5%. “Operational rigour, including utilisation and reduced use of subcontractors, resulted in a net benefit of 0.3% or 30 basis points, offset by 50 basis points headwind from higher third-party expenses and increasing cost of return to normalcy,” Samir Seksaria, chief financial officer, TCS, said in a post-earnings call.
Similarly, Wipro’s operating margins expanded 120 basis points on a quarterly basis to 16.3%. “We have continued to turn the tide on margins. The hard work we have put in to improve our supply chain, into delivery excellence, operations, automation has actually resulted in greater efficiencies. All this has contributed to a margin expansion of 120 basis points quarter-on-quarter… I do want to mention that this margin expansion is after absorbing the impact of three full months of salary increases that we have offered to our colleagues. It also factors quarterly promotions as well as the restricted stock units with granted to our senior employees,” Thierry Delaporte, CEO and MD, Wipro said in a post-earnings call. HCLTech’s EBIT margin increased 165 basis points sequentially to 19.6% while Infosys’s operating margin remained stable at 21.5% during the third quarter.