Indian IT Services – Q4 Earnings

Indian IT Services – Q4 Earnings

As April is the month for Q4 earnings and announcements, let us see how IT firms have performed this year. Tata Consultancy Services,ย Infosys, andย Mindtree have already reported quarterly earnings.

With higher Inflation resulting in rising input costs and increased geopolitical uncertainty as the Russia-Ukraine war does not seem to end, the ๐ˆ๐“ ๐ฌ๐ž๐œ๐ญ๐จ๐ซ ๐ข๐ฌ ๐š๐ ๐š๐ข๐ง ๐ญ๐ก๐ž ๐ฌ๐š๐ฏ๐ข๐จ๐ซ ๐Ÿ๐จ๐ซ ๐ญ๐ก๐ž ๐ข๐ง๐ฏ๐ž๐ฌ๐ญ๐จ๐ซ๐ฌ ๐๐ž๐ฅ๐ข๐ฏ๐ž๐ซ๐ข๐ง๐  ๐ ๐ซ๐จ๐ฐ๐ญ๐ก ๐š๐ง๐ ๐ฏ๐š๐ฅ๐ฎ๐ž.

Investors’ confidence in IT stocks gets reflected in the stock prices, with ๐๐ข๐Ÿ๐ญ๐ฒ ๐ˆ๐“ ๐ญ๐ซ๐š๐๐ข๐ง๐  ๐š๐ญ ๐š ๐/๐„ ๐ฆ๐ฎ๐ฅ๐ญ๐ข๐ฉ๐ฅ๐ž ๐จ๐Ÿ ๐Ÿ‘๐Ÿ‘.๐Ÿ–๐ฑ ๐š๐ ๐š๐ข๐ง๐ฌ๐ญ ๐Ÿ๐Ÿ.๐Ÿ—๐ฑ ๐Ÿ๐จ๐ซ ๐๐ข๐Ÿ๐ญ๐ฒ ๐Ÿ“๐ŸŽ. The higher multiples imply that the tech sector’s growth potential is high after COVID due to enterprises’ high adoption ofย #digitaltransformation,ย #cloud, and web 3.0.

๐€๐ฌ ๐ข๐ง๐ฏ๐ž๐ฌ๐ญ๐จ๐ซ๐ฌ ๐ก๐š๐ฏ๐ž ๐š๐ฅ๐ซ๐ž๐š๐๐ฒ ๐ฉ๐ซ๐ข๐œ๐ž๐ ๐ญ๐ก๐ข๐ฌ ๐ ๐ซ๐จ๐ฐ๐ญ๐ก ๐ข๐ง ๐ญ๐ก๐ž ๐ˆ๐“ ๐ฌ๐ญ๐จ๐œ๐ค๐ฌ, ๐ข๐ญ ๐ข๐ฌ ๐œ๐ก๐š๐ฅ๐ฅ๐ž๐ง๐ ๐ข๐ง๐  ๐ญ๐จ ๐ข๐๐ž๐ง๐ญ๐ข๐Ÿ๐ฒ ๐ฎ๐ง๐๐ž๐ซ๐ฏ๐š๐ฅ๐ฎ๐ž๐ ๐ฌ๐ญ๐จ๐œ๐ค๐ฌ ๐ข๐ง ๐ญ๐ก๐ข๐ฌ ๐ฌ๐ž๐œ๐ญ๐จ๐ซ.

Thus, when i analysed the IT services sector, i classified them into large IT firms like Infosys, TCS, and #Wiproย and mid-cap firms likeย #LTTS,ย #Persistent, andย #Mindtree. My analysis shows the following:

1)Large IT companies have entrenched relationships with F500 customers. As a result, they are ๐ฆ๐จ๐ซ๐ž ๐ฅ๐ข๐ค๐ž๐ฅ๐ฒ ๐ญ๐จ ๐ฐ๐ข๐ญ๐ก๐ฌ๐ญ๐š๐ง๐ ๐œ๐จ๐ฌ๐ญ ๐ฉ๐ซ๐ž๐ฌ๐ฌ๐ฎ๐ซ๐ž๐ฌ (likeย #attritionย and salary costs) while winning large deals, thus giving them an advantage in the current market scenario. However, over the ๐ฅ๐จ๐ง๐ ๐ž๐ซ ๐ญ๐ž๐ซ๐ฆ, ๐ฆ๐š๐ฑ๐ข๐ฆ๐ฎ๐ฆ ๐ฏ๐š๐ฅ๐ฎ๐ž ๐œ๐ซ๐ž๐š๐ญ๐ข๐จ๐ง ๐ฐ๐ข๐ฅ๐ฅ ๐œ๐จ๐ฆ๐ž ๐Ÿ๐ซ๐จ๐ฆ ๐ฆ๐ข๐-๐œ๐š๐ฉ ๐ˆ๐“ ๐Ÿ๐ข๐ซ๐ฆ๐ฌ due to their lower base.

2)Despite ~25% of revenues coming from Europe, theย #russianukrainianwar did not impact the Indian IT sector’s gains. As a result, there is a higher chance of additional work moving to India from eastern European countries.

3)Due to higherย #Inflation, companies with a competitive advantageย and the ability to pass higher costs to the customers will do well. Thus sectors like energy, Healthcare, and commodities have fared well compared to Manufacturing, Media, and communications. Therefore, IT companies with higher exposure to these industries will have a higher risk (beta). For instance, Infosys derives more revenues from Mfg and Media than TCS, while TCS derives high revenues from Healthcare. Thus, Infy looks to have a higher market risk when compared with TCS.

Theย #IndianIT sector will drive growth again, but most of this growth gets already priced into the stock prices. Thus, investors should get conscious of these highย valuationsย before investing.

I believe valuing any stock is neither ๐š๐ง ๐š๐ซ๐ญ ๐ง๐จ๐ซ ๐ฌ๐œ๐ข๐ž๐ง๐œ๐ž ๐›๐ฎ๐ญ ๐ข๐ฌ ๐š ๐œ๐ซ๐š๐Ÿ๐ญ. As you dive deeper into these IT stocks’ #businessmodelsย andย #cashflows, it becomes easier to identify the undervalued stock.

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