IT companies set to beat earnings estimates for December quarter

Large-cap companies such as Tata Consultancy Services (TCS), Infosys, HCL Tech and Wipro are set to report their December quarter earnings on January 9, January 12 and January 13, respectively. When the results are released this month, analysts expect an increase in operating margin to be in the headlines.

Operating margin is a measure of a company’s profitability after considering all operating expenses. A higher margin usually indicates higher profit and earnings per share of a company, making it more attractive to investors.

Large-cap IT firms were earlier expected to report a weak December quarter amid inflation in key western markets of the US and Europe, a slowdown in tech spending in sectors such as banking and financial services, and a rise in employee costs due to sustained highs. friction level.

For example, market researcher BNP Paribas’ report on Indian IT services published on Thursday said IT spending “will be resilient”, and “medium to long-term growth drivers will persist”.

“Margins are expected to expand sequentially as supply-side pressure eases,” said Kumar Rakesh, vice president, equity research, BNP Paribas. Own revenue guidance and analyst expectations for the quarter.

Ruchi Mukhija, vice-president of equity research at financial research firm Elara Capital, said the margin expansion in the IT sector should be a result of lower employee costs as well as lower employee costs as compared to previous quarters. “Many freshers who were onboarded in previous years will now complete their training period, and will be brought into the regular payroll area. This should allow IT companies to utilize their employee resources and should not increase company costs. Support Margin. “During this recessionary period, there is going to be some deceleration in revenue growth. So, naturally, during this period, the focus of investors will be on margins. As a result, it will get more attention from the service providers. As a result, margins will remain largely stable,” he said.

Factors such as lower employee cost and rupee depreciation could help boost margins, he said.

“There are forex tailwinds for these IT firms, which can help them bring in higher revenue and profit margins,” he added.

However, the market still has a word of caution. “Labour cost has still not come down fast enough. Hiring has slowed, but salaries have yet to see a clear drop. There has to be some improvement, as some bonuses were also not paid in full. But, it is unlikely to see a big jump during the quarter — and the upcoming results will help clarify whether IT services firms have done something different for better margin management,” said Akshara Bassi, research analyst at Counterpoint.

Bassi said many IT firms have hired outsourced contractors for critical projects. “Given that contractors don’t reflect in payroll, this could be a factor that affects margins,” she said.

Bassi also said that another factor that could impact margins during the seasonally weak and erratic December quarters or the upcoming March quarter is that large and long-term deals done in previous quarters begin to materialize. “We can see that the market condition can clearly improve after the June quarter this year,” he added.

Everest’s Sengupta agreed. “India’s IT industry, through its history, has been really good at managing margins, and even in times of earlier margin constraints, IT firms have kept it within acceptable limits. There is going to be slight expansion, but there will always be a compromise. We remain a bit cautious, and even though job losses and declining employee costs suggest good margin expansion, there are two contradictions,” he said.

“There will be some pricing pressure from the supply side in the first bearish environment, which may feed back into margin expansion. Second, even in declining attrition, there will be high demand for talent in certain categories – such as data scientists or cyber security analysts, which remain hot markets with scarce talent. This could have a moderate impact on the margin story, at least for now,” he said.

To be sure, the IT industry has already demonstrated margin stability over the last two quarters – slowing growth factors notwithstanding. TCS, India’s largest IT firm by market cap, reported 23.1% operating margin during the June quarter, followed by 24% operating margin in the September quarter. Infosys, India’s second largest IT firm, reported a 20% operating margin (on dollar revenue) during the June quarter, followed by 21.5% in September. According to analysts, these could see further improvement in the coming quarters – including the recently concluded December quarter.