Q3FY20 results season is well underway….even as I write this Maruti has delivered a bit of a howler. Private Banks numbers are showing enhanced slippages. But we are going to take a look at the IT majors – TCS, Infosys, HCL Tech and Wipro.
The earnings season generally starts with IT major results, the Q3 result season was no different, Infosys kicked off the earnings season and within the space of the next week TCS, HCL Tech and Wipro all declared numbers.
Lets take a broader look at how the quarter went for each and how they compared against each other, and also my favorite stock from the big four.
Q3 is traditionally a slow quarter. The month of December sees a lot of holidays world over and many employees also tend to proceed on leave. But it’s an important quarter as companies get a good sense of what the IT spending budgets are going to be in US and other significant geographies. An important vertical for IT companies is BFSI, and to get some estimate of how that spend is going to shape up will help them plan better.
The rupee had been weak during this quarter. As all the IT majors are largely export facing this showed in the revenues reported by all the companies and they reported better margins aided by a weaker rupee. HCL Tech revenue growth stood out sequentially among all, while when it came to margins it was TCS which reported a very strong performance coming in with a 25 per cent margin which is a 100 bps improvement. HCL Tech did better than expected. Most analysts had expected a margin contraction but as a result of the products acquired from IBM, HCL Tech reported a 30 bps improvement at a 20 per cent margin.
BFSI is the largest vertical for all the four and it was here that we saw some of the cracks appear. All the four companies saw slightly subdued demand in this, TCS and Infosys had a subdued quarter, HCL Tech saw a robust growth aided by the IBM business, Wipro reported the lowest growth among the four. Going forward TCS and Wipro were less upbeat than HCL Tech and Infosys, (which expects some good deals panning out) with regard to the BSFS vertical going ahead.
It was the Digital business that has provided a solid outperformance for Infosys, their business grew 40 per cent YoY and this is now contributes 40 per cent of the revenue. HCL Tech too saw decent growth in their Digital business at 22 per cent YoY again about 40 per cent of the revenue pie.
In terms of guidance, TCS doesn’t give a guidance, Infosys raised the lower end of the earlier guidance and have raised it to 10-10.5 per cent, HCL Tech too raised their lower end guidance to 16.5-17 per cent while Wipro estimated it to be between 0-2 percent, indicating that Q4 could be largely flat.
That then brings us to the question of what is the actionable idea in these four…
Infosys and HCL Tech clearly stand out.
Infosys due to the fact that their internal audit committee has given a clean chit in the recent whistleblower case. While the SEC ruling is pending this seems to have been a fairly exhaustive audit and it is unlikely that SEC will have anything different to state. Their growth has also been robust and more importantly they sound very upbeat in terms of their deal pipeline and growth going ahead. The stock had underperformed since the whistleblower case and now that that has been cleared there is a high probability that it will play catch-up with TCS.
For me TCS was frankly a tad disappointing, the margins at 25 per cent certainly look very good but in terms of growth in North America and outlook they seem to be lagging a little. That is not to say that TCS is a sell, but just purely based on Q3FY20 Infosys and HCL Tech have done better.
HCL Tech numbers seems to have checked quite a few boxes. Good growth, IBM acquisition beginning to pay off in the numbers. All verticals showed good growth, North America growth showed good traction and was better than that of all the four. More importantly it’s the stock that trades at the lowest valuation. Which is why it gets my vote.
Infosys and TCS are also great companies that will give good return to investors from current levels, in the short term Infosys may see the biggest pop but I feel that HCL Tech could be the outperformer given their strong numbers and cheaper valuations.
Hi Sharmila , what will happen to Gail India as they have been asked to pay AGR due? Will it become bankrupt as they need to pay very very huge amount that will make the company bankrupt
Hopefully there will be a solution for Gail, doubt they will be allowed to go bankrupt, lets watch this. Thanks for writing in