IT sector’s profit pie falls to 5-year low

The stock has declined about 3 per cent in the last year and came down sharply from 34 per cent share in profits in the March 2020 quarter.

The sector is grappling with the shadow of a recession, and under pressure amid global macroeconomic uncertainties and the banking crisis at US and European banks.

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The analysis is based on a compilation of data for the most recent earnings season sourced from the Capitaline database for 1,252 companies listed on the BSE. It included 66 companies from the IT and IT-enabled services sector.

The sharp decline from the peak contribution in early 2020 appears to mark the end of the sector’s dream during the pandemic when companies went on a digital buying spree.

Along with banking and financial services companies, the IT sector contributed to India Inc.’s growth in the quarter ended March 2020. 57% of the bottom line, which is now 42%. Moreover, even in the sample of profitable companies, the profit share of IT firms hit a five-year low of 18.8% in the March quarter. In the three months to June 2020, this share reached 24%.

The pain of the recession was visible in the sector’s profit contraction – 10.5% from a year earlier – the first annual decline in eight quarters.

The sequential decline in the March quarter was around 7%, compared to a growth of 6.3% in the previous three months. The sector’s topline growth slowed to 12% in the March 2022 quarter from 26.5% a year ago.

This pain is likely to persist. “The Indian IT sector is expected to witness moderate growth this year due to ongoing issues in the BFSI (banking, financial services and insurance) industry and concerns over the global economic slowdown,” said Vinod TP, an analyst at Geojit Financial Services. According to a recent report by Kotak Institutional Equities, the June quarter will be weak “as the full impact of the banking crisis and slowdown takes its toll on financial performance”.

On the expenditure front, employee cost as a percentage of revenue for the IT sector remained above 48.5% in March, a quarter-on-quarter growth of 90 bps. Average employee cost as a share of revenue for the top four IT companies rose 300 bps from pre-pandemic levels.

As a result, margins remained under pressure: the overall net profit margin of IT firms declined from 18.1% to 17.5% in the last two quarters. Experts expect margin pressure to remain stable this fiscal and expansion is expected in the next fiscal.

Vinod maintains a neutral outlook for the sector as the demand for new technologies such as cloud, artificial intelligence, cyber security and digital transformation drive deal wins and provide future revenue visibility.

Updated: May 29, 2023, 12:12 AM IST