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

The share has declined nearly 3 percentage points in the past year and is sharply down from 34% share in profits in the March 2020 quarter.

The sector is reeling under the shadow of a slowdown, and is under pressure amid global macroeconomic uncertainties and a banking crisis in US and European banks.

The analysis is based on a compilation of the recent earnings season’s data collated from the Capitaline database for 1,252 BSE-listed companies. This included 66 companies from the IT and IT-enabled services space.

The precipitous fall from the peak contribution in early 2020 appears to mark the end of the sector’s dream run during the pandemic when firms went on a digital shopping spree.

Together with banking and financial services companies, the IT sector overwhelmingly cornered 57% of India Inc.’s bottom line in the quarter ended March 2020, down to 42% now. Further, among the sample of profitable companies, too, the share of IT firms’ profits touched a five-year low of 18.8% in the March quarter. This share peaked at 24% in the three months to June 2020.

The slowdown pangs were visible in the sector’s profit contraction—10.5% from a year earlier—the first yearly decline in eight quarters.

The sequential drop was nearly 7% in the March quarter, compared with a 6.3% rise in the preceding three months. The topline growth of the sector slowed to 12% from a year earlier from 26.5% in the March 2022 quarter.

This pain is likely to persist. “The Indian IT sector is expected to see moderate growth this year because of continued issues in the BFSI (banking, financial services and insurance) industry and worries about a global economic slowdown,” said Vinod T.P., an analyst at Geojit Financial Services. According to a recent Kotak Institutional Equities report, the June quarter will be weak “as the full impact of the banking crisis and slowdown impacts financial performance”.

On the expenses front, employee costs as a percentage of revenues for the IT sector remained elevated at 48.5% in March, witnessing a quarter-on-quarter increase of 90 bps. The average employee cost as a share of revenues for the top four IT companies rose by 300 bps from pre-pandemic levels.

As a result, margins remained under pressure: The aggregate net profit margin of IT firms declined from 18.1% to 17.5% in the past two quarters. Experts expect margin pressures to stabilize this fiscal year and hope for an expansion in the next.

Vinod holds a neutral outlook for the sector as demand from new technologies such as cloud, artificial intelligence, cybersecurity, and digital transformation boosts deal wins and provides future revenue visibility.

Updated: 29 May 2023, 12:12 AM IST