IT firms post mixed September quarter earnings; digitization paints rosy picture

TCS has reported a 16 per cent year-on-year (YoY) surge in net profit in the quarter ended September 30, followed by Infosys and Wipro, whose consolidated profit grew 9.8 per cent and 7.2 per cent year-on-year, respectively.

HCL Tech reported a 2.7 per cent dip in net profit in Q2, but remained bullish on the quarters ahead on the back of a strong deal pipeline.

As far as top line is concerned, Infosys' Q2 revenue growth of 6 per cent in dollar terms was highest in the last 16 quarters. HCL Tech posted 15.6 per cent year-on-year and 3.3 per cent quarter-on-quarter growth in revenues, but a measly 0.5 per cent sequential growth in dollar revenues. TCS's revenue growth in constant currency terms came in at 3.9 per cent, while Wipro had a sequential increase of 2.1 per cent in dollar terms.

Shah said, "It is not that the global markets have melted down completely. Though pricing competition is still there and orders are coming up slow, but it should change because IT is an ever-evolving sector."

Digitisation: The way ahead

Ravi Shenoy of Motila Oswal Securities (MOSL) believes IT companies will have to focus on digital enablers. "IT companies need to work hard on transformation. HCL Tech's plan to buy Volvo Group's external IT business is a step in right direction. Whosoever will adopt digital enablers aggressively, will lead the IT pack," Shenoy told Business Today online.
 
Brokerage Edelweiss Securities believes IT industry is moving to the 10-12 per cent revenue growth phase over the next 3-5 years, riding a strong momentum from adoption of digital technologies and automation of traditional business.

Among four IT giants, TCS is riding the digital wave fastest, it said.

"The company is seeing good traction in digital business, which is now contributing 13.3 per cent of revenue from 12.5 per cent in the June quarter. It reported 10.3 per cent sequential revenue growth in this business in constant currency terms," the brokerage added.

Wipro doesn't declare its digital revenues but CEO TK Kurien did say digital business has shown strong traction with seven deal wins in the September quarter.

Wipro has also launched a programme to train around 10,000 employees in digital technologies during the year.

Infosys tied up with TOMS Shoes to maintain and develop its digital platform, while HCL Tech is also banking on the need to transform business models to adapt to the digital age.

Other triggers

All eyes will be on digital and automation segments and the measures that the IT companies adopt to ease pricing pressure. Besides, rupee-dollar movement will keep influencing IT earnings and, thus, IT stocks.

Nonetheless, Shah believes rupee-dollar equation will not be a major factor as it was in 2015.
 
"Rupee will remain an external driver to IT earnings, which will not be a major focus in 2016. Company-specific moves will be more important. We need to closely monitor as to how companies improve their margins and get more customers on board," he said.

Here's is what the marketmen have to say on four IT biggies:

TCS

TCS doesn't provide revenue forecast but CEO N Chandrasekaran stated he expects a tapering of sequential revenue growth in the second half, like in earlier years. The company generally tries to maintain margins at 27 per cent.

"We expect TCS to reflect seasonality similar to past, which implies even 2 per cent CQGR will be a high ask. Factoring in slower second quarter revenue growth, we cut our FY16 dollar revenue growth forecast to 8.4% (asking CQGR of 2%) from 11 per cent," said brokerage Edelweiss Securities in a research note.

ALSO READ: TCS remains one of the top IT stock bets

The brokerage maintains 'HOLD' on the stock with target price cut to Rs 2,480, from the earlier Rs 2,530 and said the scrip is trading at 19x FY17E EPS.

Broking firm Angel Broking maintains BUY rating on the stock with a target price of Rs 3,168.

Infosys

Infosys revised down dollar revenue guidance to 6.4 per cent to 8.4 per cent for the full fiscal year as against the 7.2 to 9.2 per cent, announced earlier. While the company did not give reasons for the cut in growth forecast, the appreciation of the dollar against major currencies is said to be the main cause.  The guidance was unchanged on a constant currency basis.

The company expects a weaker second half but hopes to end up at the higher end of 10 per cent to 12 per cent full-year growth.

"We believe Infosys' second quarter results are significantly ahead of consensus expectations. Guidance implies 2 per cent QoQ decline to flat revenues over third to fourth quarter of fiscal year 2015-16, which we believe is extremely conservative. We expect the stock price to recover going forward," said brokerage Prabhudas Liladhar.

"The company posted results better than expected on top-line and net profit, whereas the EBIT margins came in just in line with expectations," said broking firm Angel Broking.

"We maintain our ACCUMULATE rating on the stock with a target price of Rs 1,306," added the broking firm.

Wipro

Wipro has guided for a Q-o-Q sales growth of 0.5-2.5 per cent. According to the company, slow ramp-up of the clients and fewer working days in the third quarter will lead to a softer third quarter.

Wipro guided towards Q-o-Q sales growth of 0.5-2.5 per cent. According to the company, slow ramp-up of the clients and fewer working days in the third quarter will lead to a softer third quarter.

"Our estimates on Wipro are largely unchanged post the results. We currently model 10.2% Y-o-Y growth in dollar revenue for fiscal year 2016-17, but this will be hinged on to recovery in pain points, where company's performance remains hit-n-miss," Motilal Oswal Securities said in a research report.

ALSO READ: Wipro Q2 meets low estimates: Middling along

"Our target price of Rs 625 discounts FY17E EPS by 14x, and re-rating remains subject to sustained revenue traction. We maintain our Neutral stance on the stock," it added.

Prabhudas Liladhar retains "Accumulate" rating on Wipro stock with a target price of Rs 680 based on 16x Sep-17 EPS.

HCL Tech

HCL Tech does not expect a muted performance in quarters ahead. "The order book is 10 per cent higher than what we have previously seen in our history. We believe a lot of that will kick-in in the second half of our fiscal which is in January-June of 2016," Anat Gupta, CEO, HCL Tech, said.

"Considering reasonable valuation post correction and reassuring commentary from management on growth recovery in H2, we upgrade the stock to BUY from HOLD with a TP of Rs 990 at 15x Sept'17e earnings (earlier 990)," brokerage SBICap Securities said.

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