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Indian IT services companies will continue to benefit from lower travel costs and higher sales as the pandemic has reduced the need for travelling and hastened clients’ digital transformation.

Travel is likely to remain muted in the coming 2-3 quarters as virtual meetings are becoming increasingly common. Margins of IT companies have expanded 150-300 basis points because of lower travel costs, according to a Motilal Oswal report. One basis point is one-hundredth of a percentage point.

The report points out that travel costs as a percentage of revenue have decreased from FY20 to Q1FY22.

The new normal
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The new normal

For Tata Consultancy Services Ltd (TCS), travel cost has fallen from 2.1% of revenue in FY20 to 0.8% in Q1FY22. During that period, for Infosys Ltd, it has come down from 3% to 0.5%; for Wipro Ltd, it has dipped from 3% to 0.7%; and for Mindtree Ltd, it has declined from 4.2% to 0.9%.

The operating margin of Infosys for Q1FY22 stood at 23.7%, an increase of 100 basis points from the year-ago period. Nilanjan Roy, chief financial officer, Infosys, said discretionary spends like travel are expected to normalize in the coming quarters, but the company remains confident of delivering its margin guidance band of 22-24% for the full year.

TCS’s operating margin increased 1.9% from the year-ago period to 25.5% in Q1FY22, but the management has indicated a return in travel spends by the end of this year. “With many parts of the world on their way back to normalcy, we saw some return of discretionary expenses including travel," said Samir Seksaria, chief financial officer, TCS.

As states and countries gradually open up post vaccinations, some amount of travel is likely to return, but the process is expected to be elongated, and business travel would become a discretionary expense. “We do expect some increase in travel costs for the IT services industry in late FY22 and FY23; however, we continue to believe that a sustainable level of travel expenses as a percentage of revenue would be about 50% of pre-pandemic levels," analysts at Motilal Oswal said.

P.N. Sudarshan, partner, Deloitte India, concurs with the view that travel costs will not reach pre-covid levels anytime soon. “As per the trends for the quarter ended 30 June, there appears to be a slight increase of 25% in travel costs as compared to the previous quarter of FY21 but remains significantly less than pre-covid numbers. Going forward, travel-related expenses may show an increasing trend in the short term due to low base, but it’s not likely to be on par with pre-covid figures, as companies take advantage of the remote work and distributed delivery models perfected during this time."

IT companies are also limiting their travel expenses as they are driving their environmental, social, and governance (ESG) practices , which has seen a sharp rise in the past year or so. In FY21, the Scope 3 emissions of IT firms came down by 60-90%. “We expect continued lower travel costs to be an integral part of the ESG strategies of Indian IT firms," Motilal Oswal said.

However, the travel vertical of these firms has seen a strong recovery over the past three quarters. Analysts believe it would continue to perform strongly in FY22, given the lower base. The International Air Transport Association reported that the total demand for air travel in June 2021 was still at about 60% below pre-covid levels. However, revenues for IT services companies in Q1 FY22 were just 8-10% below pre-pandemic levels.

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