Wage cost stability to ease bottom line pressures
IT firms see stable staff cost amid declining attrition rate; These factors coupled with weaker Re giving much-needed comfort on margins for domestic IT sector in Q3; However, analysts forecast cross-currency headwinds to impact dollar revenue growth in H2 of FY23
Bengaluru: Indian IT services companies are getting all support from the current environment to improve operating margins, while the prospects for higher revenue growth are slowly coming under constraint.
According to sources in the know, falling employee attrition and fall in rupee value are giving some comfort to margin of IT services companies. As wage cost is going down owing to less attrition and fall in hikes, this augurs well for domestic IT outsourcing industry.
"Wage cost stability is good for Indian IT companies. Though wage slowdown will still take 24 months to work out, but it will happen," said Siddharth Pai, an IT outsourcing advisor & Founder and Managing Partner of venture capital firm Siana Capital Management.
Wage cost is the major component of domestic IT firms' cost structure as it has a share of around 50-55 per cent in the total cost. This had inched up further during the last two years. However, with attrition stabilising and hiring being done on need basis, wage cost is likely to come down during the third quarter (October-December) of ongoing financial year.
"We expect margins to improve from Q3FY23 as premium paid for backfilling attrition reduces and utilisation improves as freshers become billable," ICICI Securities said in a note. Moreover, a fall in rupee against US dollar is expected to lend a helping hand despite cross-currency headwinds.
However, drop in hiring and cautious outlook in this aspect indicate domestic IT firms' unease in maintaining the revenue growth of FY23 in the next financial year.
During the second quarter, most IT firms have maintained revenue guidance and some even raised it. Infosys has revised its revenue growth guidance to 15-16 per cent in FY23 as compared to 14-16 per cent earlier. Similarly, HCLTech has raised its guidance to 13.5-14.5 per cent from the earlier 12-14 per cent. However, tepid hiring, which is one of the lead indicators of revenue growth, reflects cautious stance of Indian IT firms.
According to global IT consultancy firm ISG, around 40 per cent of IT service companies saw annualised employee growth of six per cent or less.
"Given the tight linkage between employee growth and revenue growth in the sector, that number suggests that these firms are likely to forecast for low single-digit growth," the ISG report said. Meanwhile, analysts expect cross-currency headwinds to impact dollar revenue growth in the second half of FY23 coupled with revenue growth differentials falling between large and mid-tier IT companies.
