Operating profit margins for information technology companies may moderate to as little as 1.50% in the short term as labor cost inflation resulting from high attrition hits players in an industry with more than $200 billion, according to a report released Thursday.
The shrinkage will add to the shrinkage of up to 3.50% on the operating profit margin front for most IT companies in FY22, according to the report from national ratings agency Icra.
Earnings came under pressure in FY22 due to wage inflation and the normalization of operating overhead, he said, adding that better pricing and improved operating efficiencies , particularly in the area of digital services, helped limit the contraction in margins.
The IT sector has emerged from the pandemic crisis as one of the few that have really gained momentum because demand for digital technologies has soared as the world has worked from home and businesses have to work according to a new paradigm.
The agency said the industry was also facing increased employee attrition, driven by the gap between supply and demand, especially for digital technology talent, which has been fought over. offering healthy pay raises and incentives, more hiring and investment in retraining.
Its sector head, Deepak Jotwani, said hiring activity increased significantly from the second half of fiscal 2021 and there was a record net addition of employees of around 4.5. lakh for the industry in FY22, with most additions coming from the top five companies.
Recruitment activity will also remain strong in the medium term, he added.
“However, the costs of training and incubating new hires brought on in recent quarters and higher compensation to retain existing talent will continue to drive up labor cost inflation, leading to further moderation in operating margins for 100 to 150 basis points over the next few quarters,” Jotwani said.
With the productive deployment of new hires, utilization levels are expected to increase, the agency said, adding that with the upskilling of the existing workforce, this should largely close the gaps between supply and demand.
Attrition levels should start to decline from the end of the current fiscal year, which will bring some stability to payroll costs, he said. Optimization of the employee pyramid and better achievements will help improve operating profit margins in the medium term, the report adds.
The growth momentum seen over the past year and a half is expected to continue over the medium term, driven by a healthy demand environment with strong traction on the digital services front, he noted.