InvestorQ : As a new results season begins this month, do you see the IT companies still face margin pressure and compression in the June quarter?
sara Kunju made post

As a new results season begins this month, do you see the IT companies still face margin pressure and compression in the June quarter?

Mary Joseph answered.
1 month ago

TCS will set the tone for the June 2022 quarter when it announces the quarterly results for the first quarter of FY23 on 08th July. The June quarter is normally a good year cyclically but these are tough times and they are not normal times. The big question is once again on the outlook for earnings growth, top line growth and operating margins. Of course, TCS does not give guidance on growth or margins, but its review is good enough to give an idea.

At a macro level, the worry is that the operating margins of TCS in the June 2022 quarter would have compressed on a yoy basis as well as on a QOQ sequential basis. This is likely to be true for all the major IT companies. Of course, the most elaborate quarterly results of Infosys will be the last among the big IT names this time and will only come out on 24th July. However, supply-side challenges are yet to settle down, putting pressure on IT margins.

The cost pressures in the June 2022 quarter are likely to come from higher retention costs and higher travel costs. Most of the large IT companies have been facing record levels of attrition in the last few quarters and that is showing in sharply higher manpower costs. Overall, analysts remain optimistic as do the managements of IT companies. Top-tier and mid-cap IT services companies, top line may have been robust due to cloud and digital transformation. But one can expect signals of slowdown in the June 2022 quarter.

Overall tech spending is not likely to see any downside in the June quarter but specific sectors may be under pressure. For instance, specific sectors like real estate, retail and manufacturing are likely to face tech spending pressures in this quarter. The pressures, however, could really build up momentum in the second and third quarters of the current fiscal year, as high inflation levels and economic slowdown in the US and Europe come home to roost. Even analysts are likely to become more selective about IT upgrades.

The recent case of Accenture demonstrates that the rate of attrition is on an ascent. This is likely to compress the EBIT margins by 400 basis points, with the most pressure coming from higher travel cost and lower utilisation levels as companies hire more freshers. IT companies may find price hikes a lot tougher. IT companies should be happy with stable pricing since that would be the best they can hope for in this tough environment.

Here is how the story is likely to pan out for the top 5 premium league IT companies in India. The operating margins are likely to be lower by around 150-300 basis points on a yoy basis across the five companies. Even on a sequential basis compared to the March 2022 quarter, margins are likely to compress 100 bps on an average. To answer your query, the pressure on margins will be the big story of June quarter FY23.