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Re fall insulates IT cos from global headwinds
Weaker home currency facilitates tech firms to cushion top line and bottom line
Timely Breather
- Geo-political turmoil, rising staff cost put pressure on margins
- Further, higher attrition is a major concern
- However, rupee fall protects margins
- Re may fall up to 80/USD
Bengaluru: Indian IT services companies are expected to manage the current inflationary environment coupled with geo-political turmoil better than other sectors. Many industry watchers are of the opinion that depreciation of rupee against dollar would provide a cushion for the domestic IT firms to protect their margins and bottom lines.
"Margin will not get much impacted because of the rupee because rupee has to depreciate. Indian currency is likely to go to 80/USD. So, rupee depreciation will give a lot of comfort on the bottom line. Indian IT companies are expected to manage it better.
So, if you look at the whole capital market, IT is the best place to go and hide," V Balakrishnan, co-founder & chairman of VC firm Exfinity Venture Partners, and former chief financial officer & board member of Infosys, told the Bizz Buzz.
"(Revenue) Growth is also likely to be in high single digit or more," he added. Rupee has touched a record low of 77.63 against dollar on Friday last as capital flee happens from the emerging market to the US. Rate hike by US Federal Reserve in coming months is expected to put further pressure on the domestic currency.
After successfully defending operating margin in the first three quarters of FY22, fourth quarter saw most companies reporting fall in margin owing to high attrition. Moreover, partial resumption of work-related commercial travel with plans of companies to bring back employees to offices is likely to increase the expenses.
Against this backdrop, fall in rupee can offset some of the high expenses arising from these heads. "The main problem is attrition. It is very difficult to manage 25-30 per cent attrition without affecting the margin," says Balakrishnan.
Infosys reported an operating margin of 21.5 per cent, which was down by 3 per cent YoY for the fourth quarter ended March 2022. For Tata Consultancy Services, margins remained steady at 25 per cent for January-March period.
"We believe the demand environment will remain strong in the medium term, but we expect massive pressure on margins in first half of FY23. Inflation in the US has risen to record highs with US CPI Urban consumer index growth of 7.9 per cent YoY in February 22 versus 2 per cent average growth in US inflation index for past 10 years �� which will lead to further increase in onsite wage inflation. Talent shortage will continue to put pressure on demand fulfilment in spite of decadal strong hiring trend last year," ICICI Securities wrote in a note.
The pressure on the sector is already obvious with most mid-tier IT stocks falling more than 30 per cent in the last two months in Indian bourses. Even, most large cap IT firms have also corrected more than 10 per cent during this period.
