IT stocks to see talent tailwinds, margin revival, say analysts

Even as information technology stocks face headwinds from margin contraction and rising staff costs, analysts expect the talent-related challenges to subside and margins to improve as supply pressures ease.

Infosys Ltd. scaled back the average variable payout of employees to 70% for the quarter-ended June, amid contraction in margins and rising employee costs, PTI reported citing sources.

Its peer Wipro Ltd. also held back variable pay due to margin pressure while Tata Consultancy Services Ltd. reportedly delayed quarterly variable compensation payout for some employees by a month, according to PTI. The company later denied any delay.

Even JPMorgan downgraded IT stocks, pulling BSE IT Index 1.67% lower on Tuesday.

Yet, Sumit Pokharna, vice president of fundamental research at Kotak Securities, expects stocks of large-cap and mid-cap IT companies to perform well.

“Talent shortage, high attrition, fresher induction, high subcontracting charges and wage revision—some of these headwinds will become tailwinds once the talent situation eases,” he told BQ Prime’s Niraj Shah in an interview.

“There was a significant drop in utilisations because of fresh hiring,” he said. “This … will also improve for a few of the companies.”

According to Sandip Agarwal, executive director-institutional equities at Edelweiss Securities, investors should wait for second-quarter results before making a move on IT stocks.

“When numbers come, you will see much more relief… it will be a healthy growth. And look at data: Infosys Ltd. has upgraded guidance, Accenture Plc. has upgraded guidance,” he said. “You will again see upgrade in this quarter; whoever is giving guidance will upgrade guidance and margins will see a massive bounce.”

Agarwal is confident of margins improving in the range of 300-400 basis points over the next three-four quarters, to reclaim levels seen four quarters ago. The margins sacrificed by IT companies to mitigate attrition will return as the supply pressures fuelling the Great Resignation subside, he said.

Still, Ganeshram Jayaraman, managing director and head of institutional equities at Spark Capital, expects near-term pressures and a delay in pickup of orders. Since the valuations are not very attractive yet, Spark Capital is not in a hurry to buy IT, he said. Bloomberg