IGI Logo

Business travel costs likely to remain benign in FY23

Slow pace of travel pickup to aid margins

* With the vaccination rate improving and the reopening of economies, there is a growing expectation of travel costs (150–300bps of revenues; Exhibit 5) returning for IT services companies in FY23. This has been further reinforced by airlines’ commentaries on corporate travel. However, recent third-party surveys and industry commentaries suggest the pickup in business travel would be a prolonged affair – as enterprises continue to keep a tight check on non-urgent travel.

* Recent surveys from Deloitte and Bloomberg suggest that most companies plan to keep travel budgets meaningfully below pre-pandemic levels. Moreover, US corporate travel is expected to trend below CY19 levels throughout CY22.

* More importantly, commentaries from the travel heads of IT services peers, such as Cognizant and Capgemini, further reflect that strong controls would continue to ensure business travel is only approved for the most essential purposes. Hence, while offices are gradually being reopened, we expect travel costs to continue to trend low and support the margins of IT services companies.

* Moreover, business travel is a key profit engine for most travel and hospitality companies. Thus, a tepid outlook for business travel could pose a risk to growth in the Travel vertical of IT services companies next year. Our base case assumes strong revenue growth for the Travel vertical over FY21–23. We remain reasonably confident on FY22E on 1) increased technology intensity, 2) strong deal wins, and 3) the low base. Nonetheless, prolonged recovery adds risk to FY23E.

Commentaries from global IT peers concurs with our outlook

* Cognizant and Capgemini have outlined programs that would make employee travel extremely difficult to justify.

* Cognizant – Travel pre-authorization linked to budgets: From CY22, Cognizant would introduce a pre-authorization requirement for all travel, which would be tied to budgets.

* Capgemini – Travel cap and strong justification for travel: Capgemini is considering capping travel. The company would also question the need for and return on investment on every single trip. In this case, employees may need to bundle various reasons for their travel in the future, rather than attempting to book a flight just for a single meeting.

Lower travel cost bolsters ESG commentary of IT firms

* Economic and social shocks from COVID have brought back the focus on ESG.

* Business travel contributes to Scope 3 GHG emissions and accounts for 40–60% of the Scope 3 GHG emissions of IT service companies. Thus, limited travel not only results in cost savings but also bolsters the ESG commentary of IT services companies. In FY21, the Scope 3 emissions of IT companies came down by 60– 90%.

* We have seen Indian IT companies become increasingly ESG focused over the past 1.5 years, with many revisiting or charting out entirely new specific ESG strategies. We expect continued lower travel costs to be an integral part of the ESG strategies of Indian IT companies.

Lower travel cost supports margins

* The margins of IT services companies have benefitted from lower costs during the pandemic, particularly travel costs (150–300bps tailwinds). With the rate of vaccinations increasing, fewer government restrictions, and the re-opening of client offices, there is a narrative that travel costs would return to pre-COVID levels. However, we believe travel costs would remain low over FY22 and increase marginally in FY23, but still be below pre-pandemic levels.

Travel costs now a margin lever and discretionary expense

* Enterprises around the world have reaped the benefits of lower travel, and consequently lower costs and higher productivity. IT services companies have once again seen resilient sales and project deliveries during the pandemic. Moreover, there is now an acceptance for virtual business meetings among enterprises globally.

* As the vaccination levels in various countries continue to improve, there is talk of a return to pre-pandemic times. However, we believe the return to offices would be elongated, and business travel would become a discretionary expense (v/s semi-discretionary earlier). It would add to the numerous margin levers of IT companies.

* We do expect some increase in travel costs for the IT Services industry in late FY22 and FY23; however, we continue to believe that a sustainable level of travel expenses as a percentage of revenue would be ~50% of pre-pandemic levels.

Indian IT companies hint at rebound in travel costs

* TCS: It is seeing an uptick in many discretionary expenses; travel has also seen a marginal uptick this quarter. It expects some of the discretionary expenses to return to pre-pandemic levels by the end of the year.

* Infosys: Some of the discretionary costs, including travel and facilities, are expected to start to normalize in the coming quarters.

* Tech Mahindra: Travel cost is returning. Some of the regions are getting vaccination drives and people have started moving around.

* We note that Indian IT management seldom provides positive commentary on margins. We continue to expect lower travel costs for Indian IT companies in line with peers.

Will this impact the performance of the Travel vertical?

* The Travel vertical has seen strong recovery over the past three quarters, and we believe it would continue to perform strongly in FY22, given the lower base. Growth is expected to be led by the reversal of discounts and the resumption of deal win momentum. Nevertheless, the strong performance is already baked into valuations.

* The performance of the Travel vertical is already trending above industry performance. The International Air Transport Association reported that the total demand for air travel in June’2021 was still trending ~60% below pre-COVID travel levels. However, revenues for IT services companies in 1QFY22 were just 8–10% below pre-pandemic levels.

* Our base case assumes strong revenue growth for the Travel vertical over FY21– 23; we remain reasonably confident on FY22E, given 1) increased technology intensity, 2) strong deal wins, and 3) the low base. However, prolonged recovery in the Travel vertical may pose a risk to FY23E. Over the long term, IT spending growth would start to reflect enterprises’ revenue growth – as increased technology spending as a percentage of revenue would be a part of the base.

To Read Complete Report & Disclaimer Click Here

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412

Above views are of the author and not of the website kindly read disclaimer