News Analysis

Infosys, Wipro maintaining momentum in recent quarters

Hari Viswanath BL Research Bureau | Updated on October 14, 2021

To justify the valuations, current growth rates need to continue beyond FY23

Infosys reported September quarter revenue of ₹29,602 crore and EPS of ₹12.9, approximately 1 and 3.5 per cent above consensus estimates (Bloomberg). The earnings beat was driven by a surprise beat on operating margins, which came in at 23.6 per cent versus consensus expectation of around 22.4 per cent.

This also needs to be seen in the context of TCS missing expectations on the margin front, although it has industry-leading margins at 25.6 per cent. Infosys also increased its FY22 constant currency (CC) revenue growth outlook to 16.5-17.5 per cent versus the earlier outlook of 14-16 per cent. At the start of the fiscal, the company had originally guided for 12-14 per cent growth and the last two quarters have hence seen upgrades.

The growth in CC revenue (y-o-y) for Infosys at 19.4 per cent in the September quarter was better than that of TCS at 15 per cent, although lower than the 21 per cent growth reported by Accenture for the recently-concluded August quarter.

Broadly, the operating metrics were robust with strong growth across verticals and geographies. Its largest vertical – financial services (accounting for around 32 per cent of revenues) – grew CC revenues at 20.5 per cent, and key geographies, North America and Europe (which together account for a little over 85 per cent of revenue), grew at 23 per cent and 19.6 per cent, respectively (all y-o-y). Cash conversion also remained strong with cash from operations at 97 per cent of net profit.

The company’s significant traction in what it categorises as digital revenues continued with CC growth of 42.4 per cent. It now represents 56 per cent of total revenues.

Wipro also reported a good set of numbers with consolidated revenue of ₹19,667 and EPS of ₹5.36, 1 and 3 per cent above consensus estimates. While CC revenue growth of 28.8 per cent was better than that of Infosys, this relative beat was driven by positive impact from acquisitions. For comparison, excluding acquisitions, its organic sequential CC growth was at 4.5 per cent versus 6.3 per cent for Infosys. Operating margin for its IT services business was at 17.8 per cent. The company saw growth across all markets, sectors and global business lines. While cash flow metrics were fine, its operating cash flow to net income at 81.5 per cent was lower than that of Infosys and TCS (103 per cent).

Valuation and outlook

Infosys now trades at 30 times its next twelve months (NTM) EPS, which is a significant 60 per cent premium to its 5-year average. While a re-rating is warranted, given significant progress it has seen under its new management post exit of Vishal Sikka, at current levels it is more than adequately factored.

So is the case with Wipro, which now trades at a PE of 29 times its NTM EPS, a good 74 per cent premium to its five-year average. Accenture, which is the industry leader by a wide margin and on multiple parameters with revenues more than 3 times that of Infosys and 5 times that of Wipro, trades at 32 times.

The premium valuation that Accenture has had over Indian IT services companies has shrunk significantly over the last one year. While some narrowing may be justified, it may be a function of low interest rates globally and may reverse when interest rates start moving up.

Their PE multiples are also high when considering that FY21-23 EPS growth is moderate at around 14 per cent growth for both companies. This implies that it will require such growth to continue for many years beyond FY23 to justify current valuations. Hence, long-term investors can avoid these stocks till valuation gets to reasonable levels.

Published on October 13, 2021

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