Margins of information technology companies came under pressure in the first quarter because of wage hikes even as clients continued to spend on digital services during the pandemic.
According to Dharmender Kapoor, managing director and chief executive officer at mid-sized IT firm Birlasoft Ltd., large deal wins will be enough to overcome pressures by underdelivering segments, wage hikes, higher attrition rate and the second Covid-19 wave.
“If we look at it from the second Covid-19 wave’s perspective, it was a comeback quarter for us, because it was Q1 for most of our clients in the U.S. and Europe, which means that they start new initiatives,” said Kapoor.
Birlasoft Q1 Highlights (QoQ)
Birlasoft posted a 4.1% sequential growth in revenue to Rs 945.3 crore ($128.4 million).
Ebitda fell 0.9% to Rs 151.1 crore, while Ebitda margin contracted 90 basis points to 14%.
Margin contracted because of the impact of the second Covid wave, higher attrition and recruitment costs.
Birlasoft’s Ebitda was also “in line” with what the market has seen due to the impact of Covid-19, he said.
Attrition rose, which does impact profitability, he said, but it’s an industry-wide trend. Key personnel in the company are stable and the problem lies at the junior level, he said. “Between Q4 and Q1, despite high attrition, we had net addition of employees. We have stepped up hiring to combat this.”
Kapoor said wage hikes will have to be given in second quarter ending September but the company is prepared for that, he said. Birlasoft plans to optimise costs and leverage all operational metrics to make up for the increase, he said.
While most of the company’s segments reported growth, banking, financial services and insurance segment and life sciences saw a contraction of 0.4 and 0.9%, respectively.
“One (life sciences) programme got over so that revenue has moved out but we were still able to come close to what we were expecting,” Kapoor said.
Financial services has been slow in the two years across the sector because clients are changing strategy, impacting incremental spending. “We need to address that. We’re working on our Europe strategy, so that the segment can grow there.”
While deal wins in the first quarter at $153 million were lower than $325 million in the prior three months, Kapoor said the net new business of $94 million was encouraging. Even in the previous fiscal, most of the growth came from cross-selling, he said. The net new business was lower because sales activity didn’t happen due to no travel or meetings with clients, he said.
The company took the count of $10 million+ clients from nine in the preceding quarter to 10 in April-June, and added five more $5 million+ clients. “Demand is high but there are capacity and the supply-side constraints,” he said, adding that this has happened after many years in the IT sector. “This year will be better because there’s focus on upselling to our large accounts.”
Kapoor said a new trend is the industry is smaller, quicker deals. “Companies are ready to seal deals and see benefits every year instead of waiting around for three to four years.” he said. “So the total contract value might be higher, but that gets signed in multiple contracts rather than one large contract.”