- July 29, 2022
- Posted by: Ramkumar
- Category: Posts
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, Infosys, and 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 𝐈𝐓 𝐬𝐞𝐜𝐭𝐨𝐫 𝐢𝐬 𝐚𝐠𝐚𝐢𝐧 𝐭𝐡𝐞 𝐬𝐚𝐯𝐢𝐨𝐫 𝐟𝐨𝐫 𝐭𝐡𝐞 𝐢𝐧𝐯𝐞𝐬𝐭𝐨𝐫𝐬 𝐝𝐞𝐥𝐢𝐯𝐞𝐫𝐢𝐧𝐠 𝐠𝐫𝐨𝐰𝐭𝐡 𝐚𝐧𝐝 𝐯𝐚𝐥𝐮𝐞.
Investors’ confidence in IT stocks gets reflected in the stock prices, with 𝐍𝐢𝐟𝐭𝐲 𝐈𝐓 𝐭𝐫𝐚𝐝𝐢𝐧𝐠 𝐚𝐭 𝐚 𝐏/𝐄 𝐦𝐮𝐥𝐭𝐢𝐩𝐥𝐞 𝐨𝐟 𝟑𝟑.𝟖𝐱 𝐚𝐠𝐚𝐢𝐧𝐬𝐭 𝟐𝟐.𝟗𝐱 𝐟𝐨𝐫 𝐍𝐢𝐟𝐭𝐲 𝟓𝟎. The higher multiples imply that the tech sector’s growth potential is high after COVID due to enterprises’ high adoption of #digitaltransformation, #cloud, and web 3.0.
𝐀𝐬 𝐢𝐧𝐯𝐞𝐬𝐭𝐨𝐫𝐬 𝐡𝐚𝐯𝐞 𝐚𝐥𝐫𝐞𝐚𝐝𝐲 𝐩𝐫𝐢𝐜𝐞𝐝 𝐭𝐡𝐢𝐬 𝐠𝐫𝐨𝐰𝐭𝐡 𝐢𝐧 𝐭𝐡𝐞 𝐈𝐓 𝐬𝐭𝐨𝐜𝐤𝐬, 𝐢𝐭 𝐢𝐬 𝐜𝐡𝐚𝐥𝐥𝐞𝐧𝐠𝐢𝐧𝐠 𝐭𝐨 𝐢𝐝𝐞𝐧𝐭𝐢𝐟𝐲 𝐮𝐧𝐝𝐞𝐫𝐯𝐚𝐥𝐮𝐞𝐝 𝐬𝐭𝐨𝐜𝐤𝐬 𝐢𝐧 𝐭𝐡𝐢𝐬 𝐬𝐞𝐜𝐭𝐨𝐫.
Thus, when i analysed the IT services sector, i classified them into large IT firms like Infosys, TCS, and #Wipro and mid-cap firms like #LTTS, #Persistent, and #Mindtree. My analysis shows the following:
1)Large IT companies have entrenched relationships with F500 customers. As a result, they are 𝐦𝐨𝐫𝐞 𝐥𝐢𝐤𝐞𝐥𝐲 𝐭𝐨 𝐰𝐢𝐭𝐡𝐬𝐭𝐚𝐧𝐝 𝐜𝐨𝐬𝐭 𝐩𝐫𝐞𝐬𝐬𝐮𝐫𝐞𝐬 (like #attrition and salary costs) while winning large deals, thus giving them an advantage in the current market scenario. However, over the 𝐥𝐨𝐧𝐠𝐞𝐫 𝐭𝐞𝐫𝐦, 𝐦𝐚𝐱𝐢𝐦𝐮𝐦 𝐯𝐚𝐥𝐮𝐞 𝐜𝐫𝐞𝐚𝐭𝐢𝐨𝐧 𝐰𝐢𝐥𝐥 𝐜𝐨𝐦𝐞 𝐟𝐫𝐨𝐦 𝐦𝐢𝐝-𝐜𝐚𝐩 𝐈𝐓 𝐟𝐢𝐫𝐦𝐬 due to their lower base.
2)Despite ~25% of revenues coming from Europe, the #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 higher #Inflation, companies with a competitive advantage 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.
The #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 high valuations before investing.
I believe valuing any stock is neither 𝐚𝐧 𝐚𝐫𝐭 𝐧𝐨𝐫 𝐬𝐜𝐢𝐞𝐧𝐜𝐞 𝐛𝐮𝐭 𝐢𝐬 𝐚 𝐜𝐫𝐚𝐟𝐭. As you dive deeper into these IT stocks’ #businessmodels and #cashflows, it becomes easier to identify the undervalued stock.