IT companies will see margins expand, say brokerage companies

Even as seasonal weakness, higher furloughs, macro challenges are predicted to loom the Q3 growth for Indian IT services companies, improvement of margins is the one positive outlook for the industry.

Thanks to rupee depreciation and moderation in attrition amongst other factors, companies will see margins expand around the range of 20 to 100 basis points (bps), according to brokerage reports.

TCS, the IT bellwether that reported its Q3 earnings on Monday said its EBIT margin stood at 24.53, up 53 bps growth on q-o-qbasis.

However, it missed expectations as it was predicted to see an increase of around 74 basis points. It is now to be watched out for, how the other IT majors Infosys, Wipro, HCL Tech, who are scheduled to report earnings in the coming days will fare.

As the supply strain is predicted to ease, higher utilisation, better deal pricing, rupee depriciation, lower attrition, cooling off of wages, lower headcount addition and pyramid flattening are the margin tailwinds, according to Elara Capital’s report.

The firm expects an average q-o-q earnings before interest and taxes (EBIT) margin expansion of 40bps and says the tailwinds may offset rising travel cost and strong seasonal furlough.

Merger expenses
“EBIT margin is likely to expand by 20-100 bps sequentially for Tier-1 companies and 20- 50 bps for Tier-2 companies on account of operating efficiencies, employee pyramid rationalisation, moderation in attrition, and rupee depreciation,” Emkay Global noted in a report. Similarly, IDBI Capital notes that large caps are expected to report 35-117 bps improvement.

Although margins are expected to improve for majority of IT companies, margins of the newly merged entity LTIMindtree might not expand. Analyst at Axis Securities notes that operating margins are likely to decline by 102 bps due to higher merger expenses and one-time integration costs.

However, analysts at JP Morgan in a report noted that, single digit growth and pricing pressure in most vendor consolidation awards are likely to limit the ability to recover margins from moderating attrition, rightsizing bench and subcontractor costs and any pyramid management actions and margin expectations should reset close to current levels. The Hindu BusinessLine