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What do Q1 IT earnings tell us about the sector’s health?

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Despite decent revenues, profitability of large-cap IT companies took a hit in the April-June quarter amid higher-than-expected margin erosion.

Barring TCS, whose profit grew slower than expected, Wipro, HCL Tech and Infosys reported a sequential decline of 6-17% in net profits.

The reason behind this remained the sharply elevated attrition rates and rising employee retention costs.

Attrition levels for the tier- 1 companies continued to be around 20% or more this quarter with Infosys in the lead among peers. Wipro reported a marginal drop, while others recorded a significant rise from the March quarter.

The attrition rate, analysts say, could soon be bottoming out.

Independent Market Analyst Ambareesh Baliga says channel checks hint attrition could be dropping out. Discretionary client budget could be slashed in case of a slowdown, while weakness to continue in next two quarters. IT companies likely to pick pace post-Dec.

That said, experts believe that the IT sector remains a positive bet given the recent correction.

According to HDFC Securities, “Risk-reward is presently favourable for tier-1 IT companies as current valuations imply a modest growth ask-rate; while, mid-tier IT firms will sustain their growth premium”

Sharing a similar view, Mitul Shah of Reliance Securities says that the valuations of the sector have become inexpensive.

Mitul Shah, Head of Research, Reliance Securities says IT sector valuations near long-term average. Correction has made the sector inexpensive. He advises to accumulate on every decline and hold a positive long-term view.

Today, market action will be guided by the earnings season. Asian Paints, Bajaj Auto, L&T, Sanofi and Tata Power will be on the radar ahead of their Q1 results.

Among other key events, the much-awaited two-day policy meeting of the US Fed will begin later today.

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