In the last one month, Nifty IT fell by 10.03% to 32225.79 points while in the same period Nifty 50 is down from just 1.25% to 17135.44 points. Recently IT companies are releasing their quarter 4 results for the financial year 22.
Quarter 4 FY22 results below expectations
India’s two largest IT companies TCS and Infosys have also announced their Q4 FY22 results. The profit margins of both the companies have gone down which is less than the expectation of analysts.
In TCS Q4 FY22 results, the company showed revenue growth of 15.5% on a YOY basis and profit growth was 7% on a YOY basis. TCS has an attrition rate of 15.30%.
Despite a healthy increase in the revenue growth of TCS and Infosys, there was no comparable rise in the profits of both companies.
The quarter 4 results of Infosys and TCS indicate that the attrition rate, employee cost, and travel cost are increasing rapidly in the IT industry.
Infosys also reported revenue growth of 18.5% on a YOY basis in Q4 FY22 but YOY net profit growth was at 7.9%. The attrition rate of Infosys stood at 25.50%.
As the economy is opening up, IT professionals are exploring better opportunities, due to which the attrition rates are increasing. Due to rising competition and a limited supply of talent, IT companies are paying hikes to retain their employees.
Apart from this, companies have also made a sharp increase in their hiring, but it takes some time to train and settle new employees, which is a waste of man-hours for IT companies.
Due to the lesser number of Covid-19 cases, companies are resuming their offices and many companies are now also sending their employees to visit onsite.
IT companies are now doing offline marketing as well. All these travel and marketing expenses are affecting the margins of the IT companies.
Fed likely to hike rates and high valuation of IT stocks
Due to Rising Inflation, Central Bank across the world is raising interest rates or can. Investors are anticipating that the US Fed can make an aggressive rate hike, which can slow down the economy and this will affect the performance and growth of the business, and by this, they can reduce their spending on digitization and other IT services.
If this happens, the top line of IT companies can also be affected. Post covid IT sector was running at a very high valuation and the current P/E of companies in this sector was running 30% to 50% above their long term average P/E.
Apart from this, the market is already volatile due to macroeconomic factors like rising crude oil prices and the Russia-Ukraine war. In such a situation, due to the high valuation of IT companies and decreasing margins, investors are selling these companies.
Experts believe that the valuation of the IT sector may soon see a mean revert and this margin decline could be a trigger for the same mean revert.
According to analysts, the utilization rate of IT companies has touched historical levels, but due to increasing attrition, the utilization rate is expected to decrease.
The analysts also believe that margins may be further impacted in FY23 due to rising expenses, attrition, and accelerated hiring and margins may remain in the range of 25.1 to 26 in FY23-FY24.
Due to expected slowing revenue growth, margin concerns, and elevated valuations, experts are of the view that the Nifty IT Index may underperform the Nifty 50 in the financial year 23.
The rupee-dollar exchange rate is also a critical factor for IT companies. Falling rupee against USD improves margins of IT companies as their dollar earning gets made higher when translated into rupee term.
A positive factor for all major IT companies is that their order book is strong and growth is still strong, especially in the high margin digital segment.
Apart from this, the sub-contracting cost of IT companies will also be reduced when onsite employees replace them. According to experts, as soon as the market stabilizes again, the Indian IT sector can revive rapidly.
This article is only for education purpose and the author has his own views and research, so if you invest in these stocks/forex/Virtual Digital Asset then do it at your own risk and do the research yourself before investing.