Rising wages, recruitment costs expected to weigh on IT company margins in Q2

Most IT companies will see their margins decline in the second quarter of the current fiscal year due to pressure from wage increases to stop attrition and hiring costs to make up for lost talent.

Analysts closely watching the industry believe EBIT (earnings before interest and tax) margins will be under pressure from increased attrition and wage costs. The industry will continue to experience strong demand, however, and growth prospects remain intact for the year.

“As the specific cost of skills has increased in the market, we expect companies to try to resize their pyramids to compensate for the increase,” according to market research firm Motilal Oswal.

“Recruitment in IT companies (in our area of ​​research) will remain high as companies try to meet demand and address growing attrition, which will be a key area for investors,” he said. stated in its earnings forecast for the second quarter.

Leading IT companies are better placed to absorb supply pressure, given their capabilities in training employees in newer skills.

The research firm, however, expected comfortable growth in after-tax profit. “We expect our IT coverage universe to generate PAT growth of approximately 12% year-on-year and 1% quarter-on-quarter,” he said.

“Revenue performance is expected to remain strong across our coverage, driven by a robust demand environment and closed deals,” he said.

Strong revenue growth

“For the current fiscal year, IT companies are expected to maintain strong revenue growth (4% to 60% quarter over quarter in dollar terms) thanks to strong transaction dynamics in digital technologies,” Piyush Pandey, Senior Analyst – Institutional Equities, YES Securities, said.

The overall outlook remains strong as they are expected to record medium to high revenue growth for the current year, with overall stable margins, ”he said.

Growing demand

Research firm Emkay Global expects healthy growth momentum to continue in the second quarter, driven by strong demand for cloud, data analytics, digital transformation and cybersecurity services.

He expects 4.2-6.5% QoQ (in dollars) revenue growth for Tier I companies.

“Mid-cap companies will continue to outperform, with growth in the range of 1.0 to 9.2% (for companies in the research coverage universe,” he said.

“Tier II companies are likely to outperform Tier I companies with healthy contracts and a healthy pipeline. The shortage of qualified resources remains a major challenge in the short term, ”he observed.

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