Operating profit margins of information technology companies can moderate by up to 1.50 per cent in the near term as wage cost inflation coming on the back of high attrition hits players in the over $200 billion industry, a report said on Thursday.
The shrinking will be over and above the narrowing of up to 3.50 per cent on the operating profit margin front for most IT companies in FY22, as per the report by domestic ratings agency Icra.
Profits came under pressure in FY22 due to wage inflation and normalisation of operational overheads, it said, adding that better pricing and improved operational efficiencies, especially in the digital services domain, helped limit the shrinking of margins.
The IT sector has emerged out of the pandemic crisis as one of the few ones which actually gained heft because the demand for digital technologies soared as the world worked from homes and businesses had to work under a new paradigm.
The agency said the industry also had to grapple with a surge in employee attrition, led by the demand-supply gap, especially for digital tech talent which was combated by offering healthy wage increments and incentives, more hiring and investments on reskilling.
Its sector head Deepak Jotwani said hiring activity picked up considerably from H2 FY2021 onwards and there was record net employee addition of around 4.5 lakh for the industry in FY22, with most of the additions coming from the top five companies.
Hiring activity is going to remain strong in the medium term as well, he added.
''However, training and incubation costs for fresh hires recruited over recent quarters and higher remuneration to retain existing talent will continue to result in wage cost inflation, leading to further moderation in operating margins by 100-150 basis points over the next few quarters,'' Jotwani said.
With the productive deployment of fresh hires, utilisation levels are expected to pick up, the agency said, adding that with the upskilling of existing workforce, this is likely to address the demand-supply gaps to a large extent.
Attrition levels are likely to start tapering from the end of the current fiscal, rendering some stability to wage costs, it said. Optimisation of the employee pyramid and better realisations will aid the improvement in operating profit margins over the medium term, the report added.
The growth momentum witnessed over the past year-and-a-half is expected to sustain over the medium term, driven by a healthy demand environment with strong traction on the digital services front, it noted.
(With PTI inputs)