Shrinking margins amid rising fears of a global economic slowdown have battered the IT stocks to three-week lows with the BSE IT index shedding 1.2 percent on Tuesday.
The BSE IT Index lost 3.6 percent through the last four sessions of slump. It was down 22 percent so far this year. Among the major tech companies, Infosys fell 1.5 percent, Tata Consultancy Services 1 percent, Wipro 2 percent, HCL Technologies 1.4 percent, and Tech Mahindra was down 1.6 percent.
Rich valuations and an anticipated slowdown in IT spends, given the rising inflation and a likely slowdown in global growth, helped build the pressure on the IT stocks. A rising employee cost because of salary hikes and premium for hiring talent amid a sustained phase of attrition, too, added to the margin pressure for the IT companies.
The brunt is not merely on the investors. Moneycontrol had reported earlier that Infosys, TCS and Wipro deferred or reduced their variable payouts to employees for the April-June quarter to defend their margins.
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"After reports of variable pay cuts by Wipro and TCS, there were similar reports from Infosys, clearly reflecting that things are not as bullish as the company managements indicated after their results," said Sandip Sabharwal of asksandipsabharwal.com. "With an imminent recession in most western economies, the sector needs to be a clear underweight."
Infosys’s operating margin contracted to 20.1 percent in the first quarter of FY23, as opposed to 23.7 percent in the first quarter of FY22 and 21.5 percent in the fourth quarter of FY22. Infosys headcount as of June 30 stood at 3,35,186.
Wipro’s operating margin was down to a low of 15 percent, down 2 percent sequentially and from 18.8 percent in the year-ago period. Its attrition rate in Q1FY23 was 23.3 percent, a shade better than 23.8 percent in the previous quarter. Attrition may increase with variable pay not being given.
TCS’s operating margin in Q1 was 23.1 percent, down from 25.5 percent from the year-ago quarter, which it attributed primarily to salary increases that were rolled out from April 1. For the quarter ending June 30, 2022, TCS had a headcount of 606,331 and added 14,136 associates.
"Sharp margin misses across scale IT Services vendors in the June quarter were deeper than feared with incremental growth coming at lower margins. We expect the margin erosion to persist in the medium term and stay meaningfully below LT trends due to reversal in employee-employer bargaining power, underwhelming graduate uptake, limited price increases, return in travel/facility costs and high onsite inflation," said JP Morgan in its latest report.
"With seven out of 11 techs up for a wage hike in 2Q, upcoming margin decline is likely to be more broad-based. We see limited incremental margin levers ahead to cope with wage increases, persistent retention costs, subcons and creeping up travel/facility costs and find FY23/24 margin expectations optimistic. We turn more bearish on the sector and highlight structural margins rather than growth slowdown should be key sector concern," JP Morgan report added.
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