Flaming Inflation & Its Lukewarm Effect On The Indian IT Sector

Swamped by a horde of geopolitical issues like the Russia-Ukraine war, China’s strict COVID policies and rising inflation, to name a few, the global equity market is struggling to find its footing. Despite the INR seeing an all-time low, Indian IT companies continue to stay on their course of steady growth as opposed to shooting up. Conventionally, when the rupee is weak, it gives a massive boost to the IT sector as the USD converted into local currency propels the earnings. 

As per reports, Nifty is 5.99% down in one month. While the rupee is 4.14% down, Nifty IT has sunk further by 27.82% this year. It is unsettling to observe that IT is not getting the support it usually gets from the depreciated rupee—as per industry experts, for every rupee depreciation, the margins of IT companies increase by 14-40 bps.

Though the stocks are not soaring, the major IT players are doing pretty well for themselves. TCS‘s dollar revenue was $6.7 billion for the March 2022 quarter, which grew by 14.3% YoY in constant currency. Its peers, Wipro and Infosys posted dollar revenues of $2.7 billion and $4.3 billion respectively.

The last few quarters witnessed a relaxation in operating margins due to wage-cost inflation, fueled by demand-supply deficits and high attrition levels. With the recommencement of the traditional work-from-office model, an expected but significant rise in overhead operation costs was observed. However, overall profitability and wealth maximisation have remained unscathed.

The impact of the ongoing transnational turmoil on the IT industry is relatively limited, as the global demand for digitisation is increasing. Additionally, the Indian IT companies relocating from Russia and those aiding clients to keep up their business during these uncertain times are going to further push the margins. RBI policies are projected to induce a temporary slowdown unless there’s a sharp decline or recession.