Should IT investors start to worry about soaring travel costs hurting margins?

Indian IT companies have experienced tremendous margin growth, largely aided by a sharp drop in travel costs. But with the improvement in the vaccination rate and the reopening of economies, there is growing concern about travel costs, which represent around 150 to 300 basis points of revenue, accruing to IT service companies. A basis point (bp) is one hundredth of a percentage point.

Management comments from leading Indian tech companies such as Tata Consultancy Services Ltd, Infosys Ltd and Wipro Ltd, among others, indicated that discretionary costs, including travel, would start to make a comeback. For example, TCS management, on its June quarterly earnings conference call, said it was seeing a slight increase in many discretionary spending; travel also edged up this quarter. He expects some of the discretionary spending to return to pre-pandemic levels by the end of the year, management added.

So should investors in this industry start to worry about it? Not yet. Motilal Oswal Financial Services Ltd analysts said they expect an increase in travel costs for the IT services industry at the end of fiscal 22 and fiscal 23, but continue to believe that a sustainable level travel costs as a percentage of revenue would be around 50% pandemic level.

Recent third-party surveys and industry commentary suggest that the resumption of business travel would be an extended affair as companies continue to closely monitor non-urgent travel, the Motilal Oswal report added from September 13.

“More importantly, feedback from peer IT services travel managers, such as Cognizant and Capgemini, further reflects that strict controls would continue to ensure that business travel is only approved for the most essential purposes. Therefore, as offices are gradually reopened, we expect travel costs to continue to be low and support the margins of IT service companies, ”added the Motilal Oswal report.

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