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Frontline IT firms face margin headwinds in Q1: Report
Brokerage firm Centrum says scarcity in onsite resource led to higher onsite wage inflation, skillset shortage, higher attrition and higher visa expenses
Mumbai: Tier 1 IT services, or the frontline stocks, delivered a mixed performance in the first quarter (Q1) ending June, where HCL Tech and Tech M did well in revenue, both missing margin estimates, said brokerage firm Centrum.
The Centrum report also said that banking, financial services and insurance (BFSI) firms failed to show acceleration in the seasonally strong first quarter.
Effort mix shift to onsite led by higher traction in digital, onsite resource scarcity led to higher onsite wage inflation, skillset shortage, higher attrition and higher visa expenses, which are the margin headwinds, said the report.
"While HCL Tech and Infosys outperformed in revenue growth, TechM and Wipro exhibited tepid revenue performance. TCS also missed on the revenue growth front.
Margin performance was a mixed bag with Tech M and HCL Tech both missing the margin estimates. Digital continued to drive revenue growth momentum while traditional business remained weak owing to the deflationary impact from 'As a Service' models and Automation", it said.
BFSI continued to struggle across the Tier 1 IT pack, despite Q1 usually being a seasonally strong quarter. The manufacturing vertical also showed pockets of weakness with trade wars impacting the sentiment. Infosys and TechM are the preferred picks in Tier 1 IT space.
Mindtree and NIIT Tech are the preferred picks in the midcap IT space. "Mindtree, we believe, prices in negativity and we expect a gradual recovery in its performance, going ahead," Centrum said.
According to the brokerage firm, HCL Tech and Infosys deliver strong organic constant currency revenue growth.
"HCL Tech and Infosys deliver 3.7/2.2 per cent QoQ (quarter-on-quarter) constant currency organic revenue growth and lead the pack in Tier 1 IT.
TCS delivered 2.1 per cent constant currency growth but missed our estimates (Cen estimates: 3 per cent).
Wipro and TechM continue to disappoint by delivering (0.7) and (1) per cent constant currency decline in revenues," it said.
