To offset the hike in skill-specific demand and cost, IT companies are likely to right size their employee pyramid, said a Motilal Oswal report.

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According to TechCircle, right sizing would mean hiring more freshers who come at a lower pay package than experienced professionals. Due to a short supply of people with niche skills in artificial intelligence (AI), machine learning, and data science, cost of acquisition of these people is very high.

“Hiring across our IT coverage will continue to remain high as companies try to fulfil demand and backfill growing attrition," Mint quoted Motilal Oswal as saying in a note. The brokerage and research firm added that the resurgence of COVID-19 cases is going to pose a risk on the supply-side.

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Motilal Oswal expects companies to see a stabilisation in attrition, although at elevated levels after witnessing an acceleration in the past few quarters. “This should start reflecting first in qualitative commentary as most companies report LTM (last twelve months) attrition,” the note said.

The brokerage also expects margins of tech firms to be in a narrow range as supply pressures such as hiring and attrition are offset by operating leverage.

The brokerage recommends stocks of Tier I players over their Tier II counterparts as they have a relative valuation attractiveness and tendency to narrow down the valuation differential over time.

Companies are likely to report a strong third quarter earnings as the demand environment is likely to outweigh seasonality. The third quarter is seasonally weak due to holidays in key markets and furloughs, the Mint report said.

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Despite premium valuations, IT stocks will continue to rally sustained by the strong sequential growth momentum and expectation of a qualitative commentary on growth beyond FY22, the note said.

The brokerage expects IT companies to see a good demand environment and sustainable double-digit topline growth in the medium term on the back of increased deals on digital transformation, upward price revisions, strong demand and higher spending on cloud migration by large corporates.

(Edited by : Aditi Gautam)

First Published:Jan 3, 2022 10:34 PM IST