IT Industry May Show Mid-teen Growth And Rangebound Margin For FY22E

The Information Technology Industry may show mid-teen growth and range bound margin for FY 22, according to a report by Motilal Oswal Financial Services. "We continue to see Cloud migration, Digital transformation, and user experience as multi-year opportunities for Indian IT companies.

These will be complimented by cost takeout deals as clients normalize their budgets to increase spending on Digital transformation. Led by robust order book and decent deal conversion, we expect mid-teens growth for the sector in FY22E.

We expect margins to be rangebound as some cost pertaining to travel, normalization of utilizations, and wage hikes will now gradually return. However, this impact should be mostly offset by operating leverage due to higher growth and ongoing pyramid rationalization.

Despite valuations running at the upper end of the historical range, we retain our attractive stance on the sector and continue to prefer INFO and HCLT as our preferred picks among Tier I and PSYS, LTTS, and MPHL among Tier II IT companies, Motilal Oswal Financial Services has stated in its report.

Continuously increasing offshore mix

According to the report, the COVID-19 lockdown continues to act as a tailwind on margin in 3QFY21, with higher offshore mix and lower travel expense aiding operating margin.

"Our largecap coverage has also seen a 150bp YoY drop in sub-contracting expense, partially helped by higher share of offshore effort. Recent acquisitions (TCS - Postbank and Pramerica, Infosys - Rolls Royce and Daimler, and Wipro - Metro AG) suggests higher offshoring intensity and cost take out, indicating higher comfort with offshore delivery at large clients.

Tier I margin for 3QFY21, on the back of high utilization and offshore mix, stood at 24.1%, an increase of 90bp QoQ and 270bp YoY," Motilal Oswal Financial Services has stated.

Most of the investors in IT companies will not find the valuations cheap., given the way shares from the sector have rallied sharply.