Operating margin of Indian IT firms may contract in Q4 on high expenses

Bengaluru, 9 April Operating margins of most Indian IT services companies are likely to come under pressure in the fourth quarter earnings owing to higher expenses and currency headwinds.

According to brokerage firms, operating margins of these companies are likely to fall in the range of 20-80 basis points in sequential terms for the January-March period.

"We expect margins to contract QoQ despite the industry continuing to add record freshers. The attrition across companies would continue to be high and, hence, cost to backfill attrition (at higher costs) and costs related to retention, bonus, rationalisation of compensations are expected to put pressure on margins," ICICI Securities said in a note. "We expect all IT companies, except Coforge, to report a decline in EBIT margins sequentially in the range of 20-80 bps," it added.

Notably, despite aggressive hiring of fresh engineering graduates, HR experts are of the opinion that attrition is not coming down at a faster rate.

During the pandemic, attrition rates remain high amid a robust demand for technology talent. For the quarter ended December 2021, Infosys' voluntary attrition rate stood at 25.5 per cent from 20.1 per cent in the preceding quarter. For Wipro, attrition rate was at 22.7 per cent, up from the rate of 20.5 per cent in the second quarter. Even for the market leader Tata Consultancy Services (TCS), which usually had low employee turnover rates, also witnessed a spike. Its attrition rate rose to 15.3 per cent in the third quarter of FY22, as compared to the previous quarter's rate of 11.9 per cent. Things were similar for most mid-tier IT services and engineering services companies.

Many of the expenses relating to travel and utility costs are also slowly coming back as the pandemic shows signs of fading out in recent months.

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