As there is an increase in skill specific cost in the market, Motilal Oswal, expects Indian IT companies to right-size the pyramids to maintain the stability. According to the brokerage and research firm, for IT companies, key monitorable in the Q3FY22 commentary will continue to be the medium to long term growth visibility, attrition, and pyramid impact of fresher on boarding.

“Hiring across our IT coverage will continue to remain high as companies try to fulfil demand and backfill growing attrition, which will be a key focus area for investors. The resurgence of COVID-19 cases remains another risk on the supply-side,” says Motilal Oswal.

In spite of this, the brokerage sees margin for IT to be in a narrow range as supply pressures like attrition and hiring are offset by operating leverage. After a few quarters of continuous depreciation, there may be stabilization in attrition for IT service providers, in elevated levels.

Meanwhile the brokerage says, it prefers Tier I players over their Tier II counterparts, given their relative valuation attractiveness and tendency to narrow down the valuation differential over time.

“Continuation of the strong sequential growth momentum and expectation of a qualitative commentary on growth beyond FY22 should help sustain the rally in IT stocks, despite their premium valuations,” adds the brokerage.

As the valuation increased, Motilal is positive on a good demand environment and a sustainable double-digit top line growth in the medium term for IT companies, headed by strength in demand, increased deals on a full-scale Digital transformation, upward price revisions, and higher spend on cloud migration by large corporates.