Indian IT Firms' Margin Woes Likely To Persist Despite Steady Demand Forecast

Analysts expect margins for Indian IT companies to remain under pressure amid supply-side pressures and high attrition.

Nomura expects rising macroeconomic uncertainties to hurt tech budgets this year. It sees slowdown in hiring at big-tech firms as a cue for increased near- to medium-term uncertainty. The research firm expects margin woes for the sector in FY23, while revenue growth may disappoint in the next fiscal.

Motilal Oswal cautioned that macro challenges would hurt IT margins in the medium term.

Nomura listed Tata Consultancy Services Ltd. as a top 'reduce' idea and prefers Infosys Ltd. and Tech Mahindra Ltd. among large caps. Motilal Oswal opted for TCS, Infosys, and HCL Technologies Ltd. among tier-1 firms.

Global consultant and advisors to IT industry, however, see demand to sustain. The Information Services Group and Gartner are betting on strong demand environment for the sector.

ISG expects supply constraints to ease gradually but identified attrition as a key challenge, including external factors such as cross-currency movement and slowdown in China rather than demand slowdown. The consultancy firm has lowered deal wins growth estimate for the IT services industry. Gartner has raised its 2022 and 2023 growth estimates.

The NSE Nifty IT index slid to a 52-week low on Thursday.

All the 10 constituents of the NSE Nifty IT index logged losses.

Here's what brokerages have to say about India's IT sector:

Nomura

• Rising macro uncertainties may weigh on technology budgets in CY2023E.

• Anticipate pull-back on tech budgets in CY2023E.

• Slowdown in hiring and rising caution from big tech companies implies increased uncertainty in near to medium term.

• Volatile macroeconomic environment and sharp cross-currency movement led to ISG lowering its growth estimate for annual contract value from 5.1% to 3.5% year-on-year for CY2023E.

• Does not expect significant moderation in the revenue growth rate of Indian IT company in FY24F versus FY23F.

• Prices for in-demand digital skills like digital transformation, engineering and cybersecurity are seeking higher rate of increase while unit price decline in traditional services continues.

• Expects margin headwinds to continue for large-cap Indian IT due to supply-side pressures, high attrition and discretionary spends.

• Reiterates caution on Indian IT services sector.

• FY2023F will be marked by more margin disappointment, FY2024F by revenue growth disappointment.

• Prefers large-cap IT companies to mid caps.

• Prefers Infosys and Tech Mahindra as top 'buy' ideas and TCS as top 'reduce' area in the large-cap space.

Motilal Oswal

• Expects medium-term impact on Indian IT services industry due to macro weakness in developed markets despite strong commentary on both AAS and managed services.

• Continues to see cloud and transitional deal as major themes for the industry from a medium-to-long term perspective.

• Remains positive on the sector.

• Continues with bottom-up stance for sectoral picks.

• Prefers TCS, Infosys and HCL Technologies as top picks among tier-I players.

• Prefers Mphasis and L&T Technology as top picks among tier-II players.