Quarterly results of IT companies show positive trends despite challenges

Indian IT sector's relative earnings outperformance will sustain for the rest of FY21

wipro-infosys-reuters File photo of the Wipro and Infosys logos | Reuters

The recent quarterly results of many top-notch IT services companies in India indicate positivism and the fact that IT services companies have not been greatly affected by the ongoing COVID-19 pandemic. There have been healthy multi-million-dollar deal wins, robust deals pipeline and better-than-expected guidance by some of them. The results also indicate healthy cash flows, solid balance sheets and earnings comfort in the current volatile and disruptive times.

A recent report by Motilal Oswal Institutional Equities says that tier-I IT companies have best-in-class balance sheets, resilient business models and excellent management pedigree and it is expected that Indian IT sector's relative earnings outperformance will sustain for the rest of FY21.

“Indian IT companies’ quarterly earnings began on a solid note with IT companies delivering robust results in terms of revenue, margins, deal wins and guidance for FY21. Earnings reported by tier-I IT companies including Infosys, Wipro and HCL Tech recently have been well ahead of our expectations. In fact, we have upgraded earnings by 12-14 per cent for Infosys, HCL Tech and Wipro. This is impressive given the sharp earnings volatility seen in other sectors due to the COVID-19 pandemic-induced lockdowns and consequent demand-supply disruption,” stated the Motilal Oswal Institutional Equities report on Indian IT companies.

Though the importance of stable, consistent and rising cash flows and pay-outs usually gets exaggerated in such volatile times, it has been noted in the Motilal report that the top-5 tier-I IT companies have cumulatively returned 71 per cent of their total profits via dividends and buybacks over FY16-20. Despite the recent run-up, the report observes that the IT sector still trades at reasonable valuations, return ratios and pay-out metrics and offers an attractive risk-reward proposition.

For instance, the recent quarterly results that were announced by the IT major Wipro turned out to be surprisingly positive as it met market expectations. The company posted a net profit at Rs 2,390.40 crore for the quarter ended June 30, compared with the net profit of Rs 2,387.60 crore in the same quarter the previous year. It needs to be observed that despite a tough business environment, Wipro won a few large deals. It was selected by John Lewis Partnership, one of the UK’s leading retail groups, as a strategic partner to help drive its retail transformation agenda. Besides this, Wipro won a strategic, multi-year infrastructure modernisation and digital transformation services engagement from Germany-based energy company E.ON. The company also secured a contract from a US-based food distribution company to deploy its CoTrack solution to meet the demands of the changing workplace due to the current pandemic.

At the same time, Infosys also witnessed large deal renewals (16 percent YoY) and its largest-ever deal win (Vanguard), providing growth visibility to the company. “Large accounts of Infosys were supported by the demand in cloud, workplace transformation and automation. There was also operational rigour, aided by cost optimisation (including short-term discretionary cuts), coupled with strong cash flows in Q 1 for Infosys,” remarked Amit Chandra, Vice President, IT Research at HDFC Securities.

Similarly, for HCL Technologies, there were key positives as there were large deal flow and consolidation opportunities (overall 11 transformational deal signings were there in 1Q). HCL Technologies also has a strong cloud infrastructure business and has a strong competitive advantage with enterprises accelerating cloud adoption and higher annuity streams. Experts from Emkay Global Financial Services say that HCL Technologies June 20 quarter performance was overall strong except for the higher-than-expected revenue decline QoQ. The company defended margins well despite the pressure on revenue front. At the same time, HCL Technologies appears confident of defending or improving EBIT margins in FY21 as suggested by the 19.5-20.5 per cent outlook.