The monetary benefits that software service providers have reaped as a result of Covid-19-related travel limitations may be coming to an end. While announcing results for the September quarter, executives from major IT firms hinted at a return to pre-Covid-19 margins and earnings. Resumption of the journey is expected to increase prices, affecting profits by 1-3 per cent, according to estimations. This is happening in the midst of an overabundance of expertise, and the shortage is expected to last another two or three quarters. Over the last 5 to 6 quarters, Indian IT companies have actively protected their margins, driven mostly by value optimization as a result of the suspension of corporate air travel from March 2020. Nonetheless, from the third quarter onwards, the work-related industrial journey is expected to renew.
UB Pravin Rao, Infosys’ chief operating officer, stated on the company’s second-quarter earnings call that the company expects a lot of flexibility in the journey by November-December as a result of increased vaccination efforts in important countries including America and Europe.
HCL Technologies’ chief executive and managing director, C Vijayakumar, also told ET that some of the cost savings from remote working must be foregone.
“I’d say half the price will be returned.” The voyage will not be the same as it was before. Because people will be travelling significantly less, there will be some cost savings in the workplace. After all, it has an impact on margins, but it’s probably best to keep the reference level as the pre-pandemic margin levels,” Vijayakumar said.
Most IT companies are pushing senior employees who have been vaccinated to return to work by December or January.
These businesses have, however, stated that the cost advantages of working remotely and increased pricing efficiency gained in the previous year will not be completely lost.
“To account for both rising journey charges and absorbing the current rampant wage inflation, all IT service providers would face a margin blow of 1-3 per cent,” Phil Fersht, founder and chief executive of IT research firm HfS Analysis, told ET.
According to Nasscom, working margins increased by two percentage points to a seven-year high of 25% in the previous fiscal year (FY21), owing to cost savings from lower travel, a positive onshore-offshore mix (due to fewer onsite employment following the Covid-19 pandemic), and lower attrition rates.
According to Peter Bendor-Samuel, CEO of IT consulting firm Everest Group, 50 per cent of the price profit from the journey will be lost over the next two quarters and will continue to erode in the following quarters.
“We’re seeing strong wage inflation in practically every area, and it’s taking a long time for these prices to trickle down to buyers, so we expect margins to suffer quickly.” “However, we think that service providers will have pricing power and will be able to keep up with these prices over time,” Bendor-Samuel said.
In research, ICICI Securities stated that despite partial salary raises and supply-side price pressures, companies like Infosys, Wipro, and Mindtree had reported exceptional margins in the previous quarter.
Margins have benefited from a shift toward more outsourcing of labour and a boost in utilisation levels, but this is unlikely to continue as travel and work from the home restart, according to the report.
“With a few exceptions (Infosys, LTI, Mphasis), we expect the business’s growth rate to recover to pre-Covid-19 levels as the bottom impact normalises and one-off distortions (such Mindtree’s retail unlock rise) fade away in the post-Covid-19 equilibrium.” Provide-side pressures, along with looming cost headwinds such as travel/workplace restart, should result in margins that are significantly worse than pre-Covid-19,” the research stated.