How do you see the overall results of the IT sector for the first quarter Q1FY23 ended June 2022?

While the bottom line of the IT companies is likely to see pressure from higher operating costs, the top line is also likely to see slower growth as compared to the previous quarters. However, the good news is that the IT services sector comprising of the big guns like TCS, Infosys, Wipro, HCL Tech etc, is still likely to still log double digit revenue growth in FY23. However, it is also likely that the growth in revenues is likely to moderate by about 600 to 700 basis points compared to FY22 on tech spending concerns.

Now let me clarify that tech spending is unlikely to see a major dent. However, the impact is likely to be on pricing power of the IT service providers. The proposed annual billing hikes are likely to come under pressure in FY23 since most of the client companies would be very conscious about their budgets. This is especially true of the US and the EU markets, which account for 80% of the total business for these IT companies. The US and Europe are more prone to a sharp recession as an outcome of hawkish monetary policies.

In fact CRISIL has clearly pointed out that the IT services sector may still grow revenues in double-digits for FY23. However, CRISIL has also emphasized that the top line growth is likely to drift lower towards the range of 12-13% for the full year. That would be around 600 to 700 basis points lower than the average revenue growth of 19-20% that most of the IT companies witnessed in the last 8 years in succession. The double digit growth in FY23 will be an outcome of digitalisation, demand for new-age technologies and weak rupee.

The gist of the CRISIL report on the IT sector is that it would work both ways for the IT sector in terms of specific practices. There are the traditional practices like BFSI, telecom and manufacturing which are likely to face challenges in terms of tech spending and pricing power. However, the new age pockets like automation, digitization and digital transformation services will fill the gap to a large extent. Also, there is the likelihood of some degree of revenge IT spending, which will mitigate the risk.

CRISIL also expects that the operating profit margins or the OPM could fall from 24% last year to pre-pandemic troughs of 22-23%. The pressure on the operating margins will principally come from higher operating costs, steep increase in manpower costs, elevated travel costs and the hidden costs that these IT companies have to incur to handle record levels of attrition. Attrition for TCS for the first quarter Q1FY23 was at a high of 19.7%.

But the saving grace is likely to new age technologies for IT. Cloud infrastructure spending is likely to grow 50%. There is an added focus on emerging segments like cybersecurity, artificial intelligence (AI), machine learning (ML) and Internet of Things (IOT). Especially, the predominant BFSI sector is already seeing rapid adoption of high end IT ideas like predictive analytics, cloud and data security. In short, there is going to be some moderation in top line growth for IT services companies. However, that would be largely compensated by growth in new age technologies. Margins will be under pressure on manpower cost implications.