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IT margins to take hit due to continued high attrition, ICICI Securities

The growth of Indian IT companies is expected to moderate in Q4FY22 as witnessed in Q4 quarters historically. Margins are expected to take a hit due to continued higher employee expenses. The demand environment continued to be strong led by continued deal momentum led by sectors like BFSI, insurance etc. There would be some cross currency headwinds during the quarter, which will dampen dollar revenues, to some extent, for the quarter. The companies continue to see a demand tailwind (recent Accenture commentary and outlook suggests that) in terms of investment in newer technologies like cloud transformation (as per Accenture commentary, only 30% of applications has been migrated to cloud, suggests long tail of cloud transformation ahead), AI/ML, block chain (as per CB insights, US$25 billion (bn) have been already invested by blockchain companies in CY21), which is expected to further propel demand in coming quarters. In terms of margins, we expect them to decline (barring Coforge that is expected to post QoQ margin expansion due to better performance of advantage GO, high margin business) since supply side headwinds would put pressure on margins.

We expect TCS, Infosys, Wipro to post constant currency (CC) revenue growth in the range of ~3.0-3.5% QoQ while HCL Tech is expected to post weakest growth of 2.0% QoQ due to negative impact coming in from its P&P business. TechM, LTI, Mindtree are expected to report 5% CC growth. There would be cross currency headwinds in the range of 20-50 bps for the companies mentioned above, which would impact dollar revenue growth negatively. TCS, Infosys & Wipro are expected to see dollar revenue growth of 2.7-3.2% QoQ, respectively. HCL Technologies (HCLT) is expected to witness dollar revenue growth of 1.7% QoQ. Tech M, LTI & Mindtree are expected to see dollar revenue growth in the range of 4.5-4.8% QoQ while Coforge is expected to witness revenue growth of 3% QoQ (largely organic growth since we expect SLK global revenues to be flat QoQ). We prefer Infosys, LTI in tier-1 and Coforge in midcap.

For Teamlease, we expect the company’s overall revenues to improve 5.3% QoQ mainly led by 5% QoQ in general staffing while specialised staffing (mainly led by traction in IT staffing) is expected to recover from muted performance last quarter. We expect margins to improve 10 bps QoQ to 2.2%, mainly led by recovery in specialised HR services, which is high margin business. For Info Edge, we expect revenues to improve 11.4% QoQ to | 449 crore, mainly led by 13% QoQ growth in recruitment revenues to be driven by IT/ITeS sector while we expect 10% growth in 99 Acres and other businesses are expected to grow 2.5% QoQ. We expect margins to decline QoQ by 100 bps due to continued increase in employee as well as marketing spend.

Margins to take hit due to supply side pressure
We expect margins to contract QoQ despite the industry continuing to add record freshers. The attrition across companies would continue to be high and, hence, cost to backfill attrition (at higher costs) and costs related to retention, bonus, rationalisation of compensations are expected to put pressure on margins. We expect all IT companies, except Coforge, to report a decline in EBIT margins sequentially in the range of 20-80 bps.

Revenue, margin guidance outlook key monitorable
In the current quarter, key thing to watch will be improvement in deal pipeline, demand outlook for FY23, hiring & attrition trends, margin outlook. Further, the proposed restructuring by TCS and whether other IT companies would also follow on the same or not, would be an area of interest for the investors.

CT Bureau

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