Rupee fall likely to be major breather for IT firms

- INR-USD exchange rate will improve dollar revenue

- IT cos suffered margin pressure in H1 of FY23

- Mostly high wage cost, elevated attrition and rising G&A expenses hit bottom line

- Cos take up cost optimization includes slower hiring and onboarding freshers in phases

Bengaluru: Rupee fall is likely to act as one of the major cushions for Indian IT services companies next year amid an uncertain demand environment owing to an impending slowdown. According to experts, rupee is projected to be in the range of 83-85 per US dollar next year, which will give sound margin support to Indian services providers.

"Rupee is likely to coming to the rescue of Indian IT firms next year. We are internally pegging rupee to dollar exchange rate between 83-85. When demand is expected to moderate next year, exchange rate will boost the dollar revenue and provide much-needed support to operating margin," said a Mumbai-based analyst, who wished not to be named.

In the first two quarters of FY23, IT firms had faced persistent margin pressure owing to high wage cost, elevated attrition and rising general & administrative (G&A) expenses on the back of reopening of offices. To supplement margin profile, IT firms have opted for several cost optimization moves that include slower hiring and onboarding of freshers in phases.

Operating margin of large IT firms improved in the second quarter of FY23, though it remained below pre-pandemic level.

"We expect margins to improve from Q3FY23 as premium paid for backfilling attrition reduces and utilisation improves as freshers become billable," ICICI Securities wrote in a note.

Accenture earnings for the first quarter ended November 2022 saw the global IT major's margin improving by 20 basis points for over previous quarter. The company also witnessed a sharp fall in its attrition to 13 per cent from 20 per cent during the previous quarter.

Accenture's CEO KC McClure during the post earnings analyst call said: "There's a structural pattern of attrition that typically comes down from Q4 to Q1. But this year came down at a tick more, and we're really pleased with that. And that means we have to hire fewer replacement people, it means less recruiting costs, and you saw that in our improvement in G&A (general and administrative expenses) this quarter, and it's less ramp-up time for new hires."

Most experts feel that falling attrition is an industry-wide phenomenon, which will be reflected in the quarterly numbers of Indian IT firms in their third quarter earnings starting from next month.

"As we see moderation in attrition, we believe margin headwinds are gradually reducing. But as indicated by the management, large cost-transformation deals are likely to have lower margins in initial phase. We expect margins for Indian IT services to remain range bound in FY23," ICICI Securities added.