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The Signal- Attrition Declines, Margins improve: Road Ahead For IT

Written by - Fisdom Research

January 14, 2023 6 minutes

In the week that went by, TCS, Infosys, HCL Technologies, Wipro and HDFC Bank were the first to release their quarterly results. Analysts and investors will closely track this earnings season as India Inc delivered a dismal bottom-line performance in the September quarter amid shrinking margins. Data shows that the combined net profit of 2725 listed companies across sectors declined 6.3% y-o-y in Q2FY23, which was the first contraction after eight quarters of growth. Combined net sales of all companies rose 26% y-o-y in Q2FY23.

However, analysts expect the performance of the corporate sector to have improved in Q3 as prices of raw materials eased due to falling commodity costs.

The big four IT companies have posted decent earnings & shown remarkable resilience. It was primarily because of new noteworthy deal wins & ramp-up of deals won in the previous quarter. Before jumping on to company results, let’s have a look at some of the critical developments in the IT sector:

  • In CY22 Nifty IT index was corrected by ~27%.
  • All significant players report a decline in attrition rates, a key positive for the industry.
  • IT majors to gain from vendor consolidation theme, which is to be a huge opportunity.
  • Geopolitical conditions weigh on decision-making from Euro-area businesses.
  • Fresher hiring activity has slowed down.
  • Q3FY23 saw improved margins amid easing supply-side concerns.
  • Improvement in cloud business amid automation adopted by companies to enhance cost efficiencies.

Now that we have understood the overview of what has happened to date at the broader industry level cumulatively, it is essential to look at the hits & misses from these companies individually.

1. Tata Consultancy Services:

Key Highlights:

  • TCS beats revenue estimates with missed profit growth estimates.
  • Q3FY23 growth was broad-based in terms of verticals and geographical expansion, further boosted by strong demand in cloud computing and market share gains.
  • The attrition rate declined to 21.3% in Q3FY23 compared to 21.5 in Q2FY23. It is a big positive.

Management Commentary:

  • Management believes the quarter was better than their expectations regarding revenue and margins. Order books remain at $7.8 bn, within the guided range of $7-9 billion quarterly.
  • Demand scenario remained intact; however, there might be challenges in decision-making from Europe businesses amid geopolitical conditions.

2. HCL Technologies

Key Highlights:

  • HCL Technologies won new contracts of $2,347 mn in Q3FY23, a strong growth of 10% y-o-y.
  • Services business major contributor to revenues grew by 15% y-o-y.
  • The attrition rate for the company stood at 21.7% in Q3FY23, down from 23.8% in the previous quarter.

Management Commentary:

  • Management is optimistic that growth momentum will continue in Q4FY23.
  • The large growth in new booking deals was led by the transformation in the IT model, large vendors consolidation and adoption of the cloud.
  • Cash conversion continues to remain healthy.

3. Infosys

Key Highlights:

  • Infosys beats both revenue and profit estimates.
  • Total contract value was the strongest in the last 8eightquarters at $3.3 bn.
  • Attrition rate has declined to 24.3% Q3FY23 vs 27.1% in the previous quarter.

Management Commentary:

  • The company sees further attrition decline in the near term.
  • The company continues to benefit from market share gains and vendor consolidation amid a changing global economy.
  • Bulk deal pipeline sees improvement amid an increase in automation and cost-efficient programmes.

4. Wipro

Key Highlights:

  • Wipro beats estimates on both revenue and profit terms.
  • The company recorded total bookings of $4.3bn in total contract value terms, which is a growth 26% for the quarter.
  • Attrition rate declined to 21.2% in Q3FY23, an improvement of 180 bps vs the previous quarter.

Management Commentary:

  • The company showed strong performance in terms of margin growth after absorbing the costs made by employees. The margin expansion resulted from solid operational performance and automation-led cost efficiencies.
  • The total deal wins were strong with signing a single large deal of $1 bn.
  • The company has reported a consistent decline in attrition rate over the past four quarters.
  • The company can constantly capture market share due to higher win rates and deepening client relationships.


Investors should not consider every correction an opportunity and instead adopt a staggered investment approach to build a position in these stocks. The IT spending in Europe and North America has continued in Q3 and is expected to be strong in Q4FY23. Even though tech spending may slow down for a few quarters & the budgets may get scaled down due to supply-side pressures, the long-term trend is intact.

Markets this week

Source: BSE and NSE

  • Markets ended the week on a positive note.
  • India’s inflation index CP increased to a one-year low of 5.72% in Dec from 5.88% in % the Nov’22. CPI inflation has fallen for three consecutive months. Major decline was seen in food inflation, which declined by a sharp 4.19 percent.
  • India’s Index of Industrial Production (IIP) rose 7.1% y-o-year in Nov’22. For the eight months Apr-Nov period, the index grew by 5.5%.
  • US CPI inflation declined by 0.1% in Dec 2022. This was the first time US inflation declined since May 2020.
  • FIIs continued selling, as they sold Rs. 9,605 crore while DIIs bought equities worth Rs. 10,042 crore. So far in Jan 2023 offloaded Rs. 17,419 crore and DIIs bought Rs. 12,799 crore.

Weekly Leaderboard: 

Source: BSE

Stocks that made the news this week:

?OMCs share price gains as during the week as compensation demand was supported by Union Minister Hardeep Singh Puri. OMCs are has kept prices of petrol and diesel despite crude oil prices surging globally in 2022. This has led companies to report losses in Q2FY23. OMCs are now expecting Rs.50,000 crore for the losses incurred in 2022.

?Delhivery share price declined as the company saw a huge block deal where in around 2.84 mn shared changed hands. New age tech companies have been under the radar since their IPO lock in period is finished and key investors are exiting at lofty valuations. Nykaa and Paytm also witnessed block deals during the week.

?TCS, Infosys, Wipro and HCL Tech reported their earnings in the week. A broader earnings trend indicate that IT companies margins have improved in Q3FY23 compared to last quarter and they have also witnessed improvement in attrition numbers which indicates improving supply side concerns.

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