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Midcap IT to grow faster than largecaps; don't expect margin expansion: JP Morgan

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Midcap IT to grow faster than largecaps; don't expect margin expansion: JP Morgan

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As information technology (IT) companies gear up to kick off the Q4 earnings season, the market is waiting with bated breath on how the sector will fare. To understand what the Street expects in terms of earnings, CNBC-TV18 spoke to Ankur Rudra, India Telecom & IT Research, JPMorgan. Rudra is not hopeful on margins expanding though he mentioned that it is company-specific. He expects midcap IT companies to grow faster than the largecap names.

As information technology industry gears up to kick off the Q4 earnings season, market is waiting with bated breath on how the sector will fare.

To understand what the Street expects in terms of earnings, CNBC-TV18 spoke to Ankur Rudra, India Telecom and IT Research, JP Morgan.
Rudra believes that there will be a stronger growth in the earnings as companies are better prepared this time around. Growth has been improving in the last few years, he observed. He shared that expectations from the IT sector are high, and he expects the midcap companies to grow faster than the largecap names.
He said, "There will be stronger growth this time. Companies are better prepared on the supply side. There will be graduates getting on board because it has been a planned supply at the beginning of FY23 versus FY22, where nobody was expecting growth to be this strong and they were impacted a lot more."
"What is different this time appears to me, is midcap companies are growing a lot faster. This quarter again, we expect them to grow faster than the largecaps- our expectation for FY22 and 24 is higher as well," he shared.
He cautioned that wages, inflation and travel costs are generally negative drivers for the sector. Subcontracting will begin to trend down as travel comes back in the sector, he opined.
He reckons that margin could see a net positive on account of reduction in travel costs, however wage inflation could potentially spring a surprise on margins. Rudra clarified that he was expecting margin expansion three months ago in the last quarter but isn’t expecting it now.
He said, "With the combination of wage inflation being a lot higher than before, I think the level of wage inflation we will see probably will be 2x of what we have seen in the previous years. Wage inflation is probably the biggest risk followed by offshore wage inflation, and the travel costs are coming back as well."
"We think subcontracting costs, which rose dramatically in FY22 will probably begin to trend down as travel comes back and remember travel costs and subcontracting costs in many cases tend to be counterbalancing forces and you will see subcontracting go down. Also, you will see travel costs sort of counterbalancing; as a result there will be a net positive on the margins," he explained.
Rudra added, “Margins are very company-specific, but on an overall basis, we think at the moment, a flat margin is possible. We were more hopeful of margin expansion maybe three months ago, we are obviously not that hopeful anymore.”
Watch the video for the full interview.
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