Rating agency ICRA, in its recent research report, has said that the operating profit margins of most major IT companies have contracted by 250-350 basis points in FY2022 due to wage inflation and normalisation of operational overheads. This was partly offset by better pricing and improved operational efficiencies, especially in the digital services domain. Domestic IT services companies have witnessed significant growth in revenues over the last four-six quarters, driven by the Covid-19 pandemic-induced accelerated demand for digitisation globally, especially for services such as cloud computing, cyber-security, artificial intelligence, among others. However, the industry has also had to grapple with a surge in employee attrition, led by the demand-supply gap, especially for digital tech talent. To combat the same, IT services companies have offered healthy wage increments and incentives, significantly shored up hiring activity, offered extensive working arrangement flexibility and reskilled their employees – all leading to increasing costs.
Commenting on the trends, Mr. Deepak Jotwani, Assistant Vice President & Sector Head, ICRA, says, “Hiring activity picked up considerably from H2 FY2021 onwards and there was record net employee addition of around 4.5 lakh for the industry in FY2022. The top five leading listed IT services companies accounted for most of this addition, reporting growth of around 28% over their previous year’s employee base. Given that the demand momentum is likely to sustain, hiring activity is expected to remain buoyant over the medium term. However, training and incubation costs for fresh hires recruited over recent quarters and higher remuneration to retain existing talent will continue to result in wage cost inflation, leading to further moderation in operating margins by 100-150 basis points over the next few quarters.”
On the positive side, ICRA notes that with the productive deployment of fresh hires, utilisation levels are expected to pick up. Coupled with the upskilling of existing workforce, this is likely to address the demand-supply gaps to a large extent. Consequently, attrition levels are likely to start tapering from the end of current fiscal, rendering some stability to wage costs. Additionally, optimisation of the employee pyramid and better realisations will aid the improvement in operating profit margins over the medium term.
As per the ICRA note, the growth momentum witnessed over the past year-and-a-half is expected to sustain over the medium term, driven by a healthy demand environment with strong traction on the digital services front. Revenue visibility for most IT services companies has increased considerably in FY2022 on the back of sizeable addition to total contract value (TCV).
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