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Many major US IT companies felt the burn of macroeconomic headwinds and prepared by trimming their employee strength through massive layoffs to improve margins. However, the revenue of the major Indian IT companies in the last quarter (Q2 FY23) was consistent with the estimates with healthy outlook commentary, as per analysts. 

“The average margins of top Indian IT companies expanded by 60 bps on improving operational efficiencies. Despite the macroeconomic headwinds that prevailed in the global markets, most of the revenue was supported by cloud, engineering, and digital services. Going forward, healthy deals in the areas are estimated to drive growth," said Vinod Nair, Head of Research at Geojit Financial Services on the IT Sector outlook post the massive layoffs.

Tech companies have been trimming staff and slowing hiring as they face higher interest rates and sluggish consumer spending in the US and a strong dollar abroad.

With fresh hires, a return to office policies, and improved cost-cutting measures, IT companies' margins are likely to normalise in the coming quarters, he said. "After a major correction the valuation of IT stocks have moderated by 1/3rd, which is marginally above average and accommodative on the long term basis though volatility can prevail in the short term due to global slowdown," Nair added.

Brokerage BNP Paribas in a note last month on Indian IT said that its margin outlook for the sector now reflects further room for improvement as operating leverage kicks in, supply-side issues ease and attrition moderates. “Most companies see increased offshoring, improving utilisation and reduced subcontracting costs as major levers for margin expansion." 

Given the strong demand environment, the revenue outlook for the December quarter and FY23, shared by IT services companies, continues to be strong, as per BNP Paribas.

“Employee productivity decreased 3.4% q-q in the September 2022 quarter. LTM attrition was flat. Most companies expect attrition levels to keep moderating. Industry utilisation fell as several firms continued to onboard freshers, but managements were confident this metric would improve," BNP added.

The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. 

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