Information technology (IT) majors Tata Consultancy Services (TCS) and Infosys are expected to report strong numbers for the quarter ended June 30, 2022. However, some others face the risk of growth downgrades, as margins will remain under pressure.
Elevated attrition resulting in high retention costs, and increase in travel and discretionary expenses are expected to impact the margins of IT companies. According to analysts, companies are incurring high talent-retention costs through retention bonus and out-of-cycle wage revision, among other measures, and the challenge exists in India as well as onsite.
“This pressure will seep into margins; we forecast 70-400 basis points y-o-y decline in EBIT margin across our coverage universe,” said analysts at Kotak Institutional Equities (KIE). However, they said that EBIT has bottomed out and will improve for most in the subsequent quarters, as most pressure points are already absorbed.
Analysts highlight that on a sequential basis, headwinds are in the form of wage revision for Infosys, TCS and Tech Mahindra; increase in travel costs across all companies and visa costs for many; and decline in utilisation, as companies crank up fresher hiring to meet demand.
Attrition is expected to remain high at over 20% across companies as they deal with talent crunch in a buoyant demand environment. “Companies are expanding talent pools largely through freshers, though they take time before they get into production. In the interim, mid-cycle compensation revision and retention bonuses are common. Onsite attrition is also high across companies,” analysts at KIE said.
In terms of pricing, companies have secured some revision though not enough to offset wage inflation. “For now, a more reasonable assumption will be stable pricing rather than a view of pricing increase,” they said.
Companies will also face cross-currency headwinds emanating from 5%, 6.6% and 1.7% appreciation of the dollar against the euro, pound and Australian dollar, respectively. Cross-currency headwinds are expected to be between 120 and 200 basis points. “Optically, rupee depreciation may appear as a tailwind; however cross-currency headwinds have ensured only a marginal tailwind for the quarter,” they said.
IT companies are also expected to report robust new deal wins, with a strong demand pipeline and no material change in their decision-making cycle.
Also, analysts expect a divergent performance across companies sequentially due to seasonal factors, while the year-on-year growth is expected to remain strong. “On a sequential basis, performance will vary depending on seasonal factors and a certain amount of portfolio stress. We believe Infosys will lead the way with growth of 4.5%, followed by TCS at 3.6%,” analysts said.
However, seasonal weakness is expected to impact the growth of Tech Mahindra at 2.6% in cross-currency (CC) terms, Wipro at 2.8% in CC terms and 2.1% organic, and HCL Technologies at 2.4% in CC terms. “Mphasis will report a weak quarter due to a likely decline in the BPO business linked to mortgage origination and refinancing. LTI (L&T Infotech) will report modest 3.1% growth due to lower pass-through revenues. Mindtree will lead the way on growth among mid-tier companies,” they said.
Meanwhile, the year-on-year performance is expected to remain strong across the board and range from 2-4.5% for the Tier 1 and 3-5% for the mid-tier category.
The earnings seasons starts from July 8, with TCS reporting its financial numbers for the April-June quarter.