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Our conversations with managements in the IT Services space (as highlighted in our Q2 FY23 result preview) indicates sustained positivity around enterprise IT spends, despite a slowdown in corporate growth. This has led to a continuation in supply shortages (leading to margin pressures), despite record employee addition and wage hikes.
As we head into a slower third quarter, we see additional risk from this shortage, given the difficulty in executing a hard shift to excess supply from scarcity mode.
While we factor in levers to control costs (cuts in sub-contractor and variable pay, higher utilisation, freshers getting billable etc.) in our Q3 FY23 base case for margin expansion, we see downside risks to profitability as the industry may lag in cost optimisation measures due to the sudden shift.
Margin pressures in a seasonally weak third quarter will lead to a perfect earnings storm and investor focus on near term pain at the cost of the long-term opportunity.
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