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Should IT investors start worrying about spike in travel cost hurting margins?

With improvement in the rate of vaccination and reopening of economies, there is a growing concern about travel costs in the IT industry.Premium
With improvement in the rate of vaccination and reopening of economies, there is a growing concern about travel costs in the IT industry.

  • Though analysts expect some increase in travel costs for the IT services industry in late FY22 and FY23, they believe that a sustainable level of travel expenses as a percentage of revenue would be around 50% of pre-pandemic level

Indian IT companies have been witnessing stellar growth in margin, largely aided by a steep decline in travel costs. But with improvement in the rate of vaccination and reopening of economies, there is a growing concern about travel costs, which form around 150–300 basis points of revenues, returning for IT services companies. One basis point (bps )is one hundredeth of a percentage point.

The management commentaries by key Indian technology companies such as Tata Consultancy Services Ltd, Infosys Ltd and Wipro Ltd among others, have indicated that discretionary costs, including travelling, would start making a comeback. For instance, TCS management in its June quarter earnings conference call said It is seeing an uptick in many discretionary expenses; travel has also seen a marginal uptick this quarter. It expects some of the discretionary expenses to return to pre-pandemic levels by the end of the year, the management added.

So should investors in this sector start worrying about it? Not yet. Analysts at Motilal Oswal Financial Services Ltd said they expect some increase in travel costs for the IT services industry in late FY22 and FY23, but continue to believe that a sustainable level of travel expenses as a percentage of revenue would be around 50% of pre-pandemic level.

Recent third-party surveys and industry commentaries suggest the pickup in business travel would be a prolonged affair as enterprises continue to keep a tight check on non-urgent travel, added the Motilal Oswal report dated 13 September.

"More importantly, commentaries from the travel heads of IT services peers, such as Cognizant and Capgemini, further reflect that strong controls would continue to ensure business travel is only approved for the most essential purposes. Hence, while offices are gradually being reopened, we expect travel costs to continue to trend low and support the margins of IT services companies," added the Motilal Oswal report.

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