IT cos' margins likely to be under pressure

- Investors keen on deal pipeline, attrition

- Supply-side issues impact margins

- 2.6% Re fall may offset loss partially

- Q1 will also have wage hike cycle

- Infy expected to maintain revenue guidance at 12-14%

Bengaluru: As Tata Consultancy Services (TCS) is all set to kickstart the earnings season from this week, most brokerage firms and industry experts are of the opinion that both large and mid-tier firms will continue to post robust revenue growth despite recessionary concerns.

However, many expect operating margin to come under pressure despite rupee touching a record low level. Factors like attrition, net addition of employees, commentary on demand environment and deal pipeline will be keenly watched to gauge prospects of the sector in coming quarters.

"IT firms are likely to post good revenue growth in Q1 of FY23. For any slowdown to reflect, it will take at least two quarters. So, demand slowdown may be seen in numbers towards the end of this year or early next year," V Balakrishnan, Chairman of Exfinity Ventures & Former CFO of Infosys, told Bizz Buzz.

According to brokerage firm Motilal Oswal, tier-I companies (large IT firms) should deliver revenue growth in a narrow range of 2.3-3.9 per cent in sequential (CC) term, whole tier-II players (mid-tier IT firms) are likely to grow in the range of 1.9-5.3 per cent.

Large firms including Infosys and HCL Technologies are likely to maintain their annual guidance provided during the beginning of the financial year.

According to Kotak Securities, Infosys is expected to maintain its full-year revenue growth guidance at 12-14 per cent in constant currency terms and operating margin band at 21-23 per cent, which the Bengaluru-headquartered IT firm provided during April.

Similarly, HCL Technologies is also likely to retain its revenue growth guidance of 12-14 per cent and margin guidance of 18-20 per cent for FY23. Most brokerage firms don't expect any change in the growth guidance coming from IT firms yet despite slowdown concerns.

"Supply-side pressures will continue to weigh on margins with rupee depreciating against dollar by 2.6 per cent sequentially expected to offset it partially. Besides, first quarter will also have the wage hike cycle for some players like TCS, Infosys, Tech Mahindra, L&T Infotech, Coforge, and Cyient," Philip Capital wrote in a note.

With normalisation of economy, most IT firms have started physical conferences with travel plans of executives being resumed in April-June quarter. Moreover, many of IT engineers are coming back to offices, leading to increase in utility cost for IT companies. These factors are likely to have affected the operating margins of most IT firms with higher impact on mid-tier companies.

With regard to attrition, most brokerage firms expect to be high despite some signs of easing. "Attrition is likely to be more than 20 per cent across companies as they deal with a talent crunch in a buoyant demand environment," Kotak Securities said.

As earnings season starts with TCS announcing its results on Friday, investors will keenly watch management's commentary on demand environment, deal pipeline, attrition & talent demand, and client-specific issues among others.

IT firms are likely to post good revenue growth in Q1 of FY23. For any slowdown to reflect, it will take at least two quarters. So, demand slowdown may be seen in numbers towards the end of this year or early next year

-- V Balakrishnan, chairman of Exfinity Ventures & former CFO of Infosys