Information technology companies’ operating profit margins could shrink by up to 1.50 per cent in the near-term, as wage cost inflation looms large due to higher workforce in the USD 200 billion industry, a report said on Thursday. Is.

According to a report by domestic rating agency Icra, there will be a shrink on the operating profit margin front by up to 3.50 per cent for most IT companies in FY22.

Profits were under pressure in FY12 due to wage inflation and normalization of operating overhead, it said, adding that better pricing and better operational efficiencies, especially in the digital services space, helped limit shrinking of margins.

The IT sector has emerged from the pandemic crisis as one of the few that actually grew as demand for digital technologies soared as the world worked from homes and businesses had to operate under a new paradigm. .

The agency said the industry also had to contend with a surge in workforce due to the demand-supply gap, particularly for digital tech talent, which needs healthy pay increases and incentives, more hiring and investments in re-skilling. Offered was added.

Its sector head Deepak Jotwani said that the hiring activity has picked up significantly since H2 FY2021 and a record net employee addition of around 4.5 lakh was added to the industry in FY22, most of which came from the top five companies.
Hiring activity will remain strong in the medium term as well, he added.

“However, wage cost inflation will continue as a result of training and incubation costs for newly recruited new employees in recent quarters and higher remuneration for retaining existing talent, leading to a 100-150 basis points increase in operating margin over the next few quarters. And there will be less.” Jotwani said.
With productive deployment of new employees, utilization levels are expected to accelerate, with upskilling of the existing workforce, it is likely to largely bridge the demand-supply gap, the agency said.

It said that from the end of the current financial year, the level of layoffs may start reducing, which will bring some stability in the wage cost. The optimization of the employee pyramid and better realizations will help improve operating profit margins in the medium term, the report said.

Driven by a healthy demand environment with strong traction on the digital services front, the growth momentum over the past year and a half is expected to sustain over the medium term.