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IT firms’ margins to remain elevated in the immediate term: ICICI Securities

The Earnings before interest and taxes margins of most Indian IT services companies are expected to return to pre-covid normal levels as and when traveling resumes and clients start demanding pass-through of benefits. (Abhijit Bhatlekar/Mint)Premium
The Earnings before interest and taxes margins of most Indian IT services companies are expected to return to pre-covid normal levels as and when traveling resumes and clients start demanding pass-through of benefits. (Abhijit Bhatlekar/Mint)

  • Another round of wage hikes in FY22, pricing pressure from clients, and higher cost of specialized skill sets should more than negate the incremental margin benefits in FY22, the report added

Operating margins for IT companies are likely to remain elevated in the immediate term (H1 CY21) due to covid-led transient tailwinds, such as continued travel restrictions and work-from-home model, ICICI Securities said in a report dated 4 March.

“We expect further improvement in metrics, such as offshore effort as incremental project ramp ups too happen offshore," the report added.

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However, another round of wage hikes in FY22, pricing pressure from clients, and higher cost of specialized skill sets should more than negate the incremental margin benefits in FY22, the report said.

The Earnings before interest and taxes (Ebit) margins of most Indian IT services companies are expected to return to pre-covid normal levels as and when traveling resumes and clients start demanding pass-through of benefits.

The report further stated that long-term visibility around a technology change is often limited. A case in point was the hype around blockchain and internet of things (IoT) over FY15-18, when many IT services companies expected to derive meaningful revenues over the medium term but the business never scaled up to expectations.

“In the current context, this makes us more cautious as the entire consensus optimism seems to be baked into the longer-term growth even as near-term revenue trajectory (FY20-23) remained constant or lower," the report said.

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