Stock Fundamentals

Q3 results of IT companies: A mixed bag

Vivek Ananth | Updated on February 02, 2020 Published on February 02, 2020

An overview of the verticals and geographies that drove the performances

In a quarter that is traditionally weak for IT services companies, the December results of India’s top four companies in the sector — Tata Consultancy Services, Infosys, HCL Technologies and Wipro — were a mixed bag.

TCS managed to retain its margins, while Infosys continued to post decent revenue growth, despite a slowdown in core services revenues. HCL Tech posted good revenue growth, helped by its nascent products and platforms business.

Wipro, despite reporting decent growth in revenues, gave muted sequential revenue growth guidance for Q4FY20.

TCS

For the quarter ended December 31, 2019, TCS posted a revenue of ₹39,854 core, up 2.2 per cent quarter-on-quarter. The consolidated net profit came in at ₹8,118 crore, up 1.1 per cent.

TCS’ revenue growth has continued to slow as the banking and financial vertical is still facing some challenges in the US and the UK.

Although the retail and CPG (consumer packed goods) vertical is facing some headwinds in the face of some clients holding back spends, it posted 3.3 per cent q-o-q revenue growth in dollar terms. The vertical could continue to remain volatile for TCS going forward.

There has been a sequential uptick in EBIT margins (of 100 bps) to 25 per cent during the quarter, thanks to better utilisation of employees and forex gains.

While the slow revenue growth has dampened investor sentiment (as TCS may not post a double-digit revenue growth for FY20), its dividend yield of over 4 per cent is comforting. The stock has remained resilient, despite trading at a premium valuation of 25.3 times price-to-earnings (trailing 12-months).

Infosys

Infosys upped its revenue guidance to 10-10.5 per cent for FY20 from 9-10 per cent earlier.

Revenues from digital projects have been able to sustain their growth for the past few quarters.

It now makes up for over 40 per cent of the firm’s total revenues. There has been some weakness in the financial services space, where revenues shrank in dollar terms during the quarter. Manufacturing and life sciences verticals helped the company post decent revenue growth.

The North American region saw tepid dollar revenue growth during the quarter, but that in Europe aided the overall revenue growth.

There has been a cloud over Infosys’ stock since a whistleblower’s complaint in November 2019. The allegations included questionable accounting practices at the company.

The management was cleared of any misdoings by the audit committee of the company.

It still faces regulatory scrutiny over allegations that the management inflated revenues.

HCL Technologies

HCL Tech’s Q3 performance was boosted by its products and platforms business. This includes the suit of products that was acquired from IBM nearly 18 months ago for about $2 billion. This segment posted a sequential revenue growth of 16.8 per cent in dollar terms during the quarter ended December 31.

HCL Tech posted a dollar revenue growth of 3.5 per cent, helped mainly by its European operations, as revenues from the US shrunk during the quarter.

It posted margins of 20.2 per cent during the quarter compared with 20 per cent in the previous one.

HCL Tech upped its FY20 revenue growth guidance to 16.5-17.0 per cent while raising the margin band guidance to 19-19.5 per cent (from 18.5-19.5 per cent earlier)

Wipro

Like most IT services companies, Wipro is also facing headwinds from the financial services sector. Slowing spends of large European banks and capital market clients have weighed on Wipro’s revenues from this vertical.

However, the improving performance of its consumer and healthcare verticals have helped.

The company posted a consolidated net profit of ₹2,463 core on revenues of ₹15,740.5 crore.

The firm managed to meet its revenue guidance for the quarter (revenues of $2.095 billion) .

But its revenue guidance for Q4FY20 implies 0-2 per cent q-o-q dollar revenue growth, which is a concern for investors.

This is despite almost all of its verticals and business units posting decent dollar revenue growth during the quarter.

Published on February 02, 2020
This article is closed for comments.
Please Email the Editor