Bernstein Positive On Indian IT As It Sees Sufficient Levers To Improve Margins

The current business scale and flexibility in cost structure allows Indian IT services companies to leverage their margins, according to Bernstein.

The global asset management firm identified pricing power from customers, wage inflation, currency, and pyramid mix or offshoring as key variables driving EBIT margins of Indian IT firms. Higher offshoring and a better pyramid mix are the levers supporting margins, the report stated.

Bernstein remains positive on the IT sector, preferring large caps over mid caps, with Infosys Ltd. being the top pick, due to deep digital positioning, strong growth momentum, and attractive valuation. Bernstein also maintained "outperform" on Tata Consultancy Services Ltd. due to its "billion-dollar playbook and resilient margins", while its valuations keep the risk/reward in balance.

Salary costs have the highest contribution to total costs, quite similar to the 2004-08 period of high growth before the realignment of variable pay during the 2009 global financial crisis, as companies sought to attain flexibility on margins.