Largecap IT sector stocks to buy after Q4

Most of the IT sector stocks reacted after presenting their q4 earnings starting with TCS, earnings were mostly below street expectations. Muted earnings made IT stocks correct barring some midcap names that positively surprised market. Slowdown in western economies are troubling Indian IT co’s as there major revenue come from US, Europe. Let’s analyze how big the challenges are and what experts are saying about IT stocks performance.

Among IT sector stocks starting with IT giant TCS

TCS came out with it’s results on 12th April,2023.

• Revenue for the year FY23 at Rs 2,25,458 crore, a yoy growth of +17.3% and 13.7% in constant currency terms(yoy)
• Quarterly revenue at Rs 59,162crore for march 2023 q4, yoy growth of +16.9%,(+10.7% in constant currency terms), quarter on quarter revenue grew by 1.6%(58,229 crore in q3)
• Operating profit at ₹15,774 crore in quarter4, growth of 13.9% yoy.
• Net profit for the march quarter at ₹11,392 crore, growth of 14.8% yoy.
• Operating margin at 24.5%, net margin at 19.3%
• Basic EPS at 31.14 in q4 of Fy23 against 26.85 in q4 Fy22, growth of 16% yoy.
• EPS for full year Fy23 at 115.19 a growth of 10% yoy

Outlook remains mixed for TCS on short term basis

Though long term overall outlook remains strong, problem may persist for few more quarters, says analysts while reviewing TCS q4 performance. Brokerages noted demand environment remain strong as deal wins the metric to judge the demand environment remain “robust”. With an order book of $10 billion in q4-Fy23, deal win Total contract value was strong, with a solid deal pipeline and accelerated deal velocity, especially in Europe. Few brokerages noted that due to uncertain environment clients are taking longer time for decision making and are slowing down the discretionary IT projects, resulting in lower revenue growth in FY24.

Risk-reward ratio: According to analyst estimates a downside risk of 18.5% and upside chance of 40.5%.

Infosys result analysis

Infosys released it’s quarterly number on 13th April,2023. Infosys results surprised street on negative side. Till previous quarters Infosys was the one from Large cap IT stocks that mostly managed to ‘beat’ analysts expectations but this time it failed to do so. Management blamed economic uncertainty and cautious environment in western markets(specially in north America) and unplanned project ramp downs for mayhem in quarter 4 numbers. Though management also pointed out that it saw some sign of stabilization in march but the environment remain uncertain so being cautious they reduced the forward guidance.

• Reported revenue at ₹37,441 crore, a growth of 16%yoy. In constant currency terms revenue grew by 8.8% yoy but declined by 3.2% qoq.
• Digital revenue at 62.9% of total revenue, CC growth of 15.0% yoy.
• Consolidated net profit of 6,128 crore a growth of 7.8% yoy but a decline if compared qoq as
• A decline in margin was reported in both qoq and yoy basis. Margin declined 0.6% yoy and 0.5% qoq.
• Basic EPS at Rs.14.79, a growth of 9.0% yoy.
• Free cash flow at Rs.5,844 crore, a growth of 1.3% yoy. FcF conversion at 95.3% of net profit
• For full year FY23 reported revenue at ₹1,46,767 crore, a growth of 20.7% yoy and a growth of 15.4% in constant currency terms.
• FY23 operating margin at 21.1%, a decline of 1.9% yoy. Basic EPS at ₹57.63, a growth of 9.7% yoy.
• FCF at 20,443 crore, decline of 9.7% yoy. FcF conversion at 84.8% of net profit.

Let’s take a look at what brokerages has to say for Infosys after a tepid q4 show. As Infosys management reduced forward sales growth guidance to 4-7% for Fy24(23-24) because of reduction in client spending and uncertain demand outlook led by turmoil in US banking sector. Analysts pointed out that situation can remain tense for IT stocks for 2-3 more quarters before bottoming out. If there is delay in order placing and too much discussion on discretionary spends, pricing pressure arise as is visible in q4 numbers and that challenge may remain in FY24.

Risk-reward ratio: Brokerage estimate suggests an downside risk of 4.5% and an upside chance of 50+%

HCL Technologies Q4 numbers

HCL tech released it’s numbers on 20th April, 2023. HCL tech numbers were better than peers as it managed to beat analyst expectations on profit front. Brokerages said HCL Tech q4fy23 numbers were broadly in line but Fy24 guidance reflects challenges in macro environment. Compared to previous quarter q3fy23 only IT& business service managed to grow, others like R & D, services business, software business registered a de-growth pulling down the margin. Management while recognizing the near term uncertainties given the guidance for revenue growth at 6-8% in CC. The margin guidance of 18-19% appears conservative and realistic like earlier as among large IT stocks HCL Tech mostly presented realistic guidance.

• Revenue at ₹26,606 crore, down 0.4% qoq and up 17.7% yoy.
• Constant currency revenue up 10.5% yoy but down 1.2% qoq.
• EBIT at ₹4,836 crore(ebit margin 18.1%) EBIT up 18.8% yoy but down 7.5% qoq.
• Net income at ₹3,983 crore, net margin at 14.9%. Net up 10%yoy but down qoq.
• For full year FY23, Revenue crossed milestone of 1,00,000 crore. Rev was 1,01,456 crore up 18.5%. In constant currency rev up 13.7%
• Net income at ₹14,851 crore, up 10.0%
• Basic EPS at ₹54.7 from 49.8 in fy22.

Risk-reward ratio: HCL tech stock have a downside risk of 11% and an upside chance of 48% acc. to analyst estimates.

Tech Mahindra Q4 earnings

Tech Mahindra reported its Q4 earnings on April 27,2023. While revenue and profit was ok but big miss was there in operating margin front as it reported an operational margin of only 9.6% against street expectations of 12%. Overarching macro environment played spoil sport for the company but management is confident that headwinds will ease in few quarters. Management pointed out that it is aggressive in investment in frontier technologies such as open AI and automation. Company is also diversifying to other major markets such as Japan and middle east to ease the effect of macroeconomic pressure in US and Europe.

• In Q4 FY23, revenue at ₹13,718 crore, up 13.2%yoy but down 0.1%qoq.
• Consolidated PAT at ₹1118 crore, down 13.8%qoq and down 25.8% yoy.
• Operating profit margin at 13.18% down both on qoq and yoy basis.
• Basic EPS at ₹12.67, down from ₹14.70 in q3fy23 and down from ₹17.09 in q4fy22.
• In FY23 revenue at ₹53,290 crore. up 19.4% from previous year.
• PAT at ₹4,832 crore, down 13.2%you.
• Free cash flow of Rs4,002 crore, conversion to PAT at 84%.

Risk-reward ratio: TechM stock has an upside chance of 31% while a downside rusk of 18% according to price for sat estimates given by analysts.

Wipro Q4 FY23 earnings

Wipro reported the quarterly and yearly numbers on April, 27,2023. Wipro numbers were tepid like other larger IT stocks TCS and Infosys as Wipro reported a marginal decline of 0.4% on yoy profit. Highlight of the results were, tepid top line, stable IT service margin, very weak guidance for quarter1 and robust order flow but a disconnect between order and execution is visible. Weak Macros are in play for Wipro too like most other IT stocks (services companies) but it is puzzling in Wipro’s case that higher bookings are not translating into similar growth in revenues.

Barring energy and Healthcare sector all other industry verticals specially Bfs and Hi-tech were weak, management blamed slowdown in discretionary spending and project ramp down for the same. Troubling part was Q1 guidance, near term challenging outlook made management cautious while giving Q1Fy24 guidance, The company expects constant currency revenue to contract between 3% and 1% in IT services including India state run enterprise(IRSE) segment.

• For Q4Fy23, Gross revenue reached Rs231.9 billion, down 0.2%qoq and up 11.2% yoy.
• Total bookings were up by 29% and large deal bookings were up by 155% year-on-year.
• IT services segment revenue at 2,823 million, a growth of 0.7% qoq and 3.7%yoy.
• IT services operating margin at 16.3%, flat qoq but declined 0.6% yoy.
• Net income for the period q4 at ₹30.7 billion, increase of 0.7% qoq and decrease of 0.4% yoy.
• Earning per share(eps) at ₹5.61, an increase of 0.7% qoq but decline of 0.5% yoy.
• For Fy23, Gross revenue reached ₹904.9 billion, up 14.4% yoy.
• IT services revenue at ₹11,159 million, an improvement of 7.8% yoy, operating margin at 15.7%, down 2.05% yoy.
• EPS for full year Fy23 at ₹20.73, decline of 7.2% yoy.

Analysts pointed out weakness in consulting a key growth driver for Wipro may be impacting the company disproportionately. Most of negatives are in price as IT stocks corrected significantly from all highs, valuation has reached pre pandemic level but cautious stance is needed until there’s more clarity in earnings growth and better conversion of orders in to revenue.

Risk-reward ratio: With an upside chance of 22%, Wipro can see a downside of 16% based on analyst price target.

Key trigger and current valuation of these IT stocks

IT stocks always remain a darling for investors because of strong cash flow, transparent management, high margin business and generous profit sharing with shareholders but recent micro events created headwind for the sector. From past year investors have dumped IT stocks. Let’s take a look at valuation of these It stocks and analyze is time right to start accumulating them for long term. You can read more about IT spending worldwide and valuation report by Gartner by clicking.

Note: Will discuss about Wipro buyback in next article xo please stay tuned for that.

IT stocks are bound to react on macros as there revenue comes from different developed and emerging economies and any talk of recession, slowdown in economy, cut in discretionary spending, delay in order making in sectors like hi-tech, Telecom, banking, Cloud& Ai etc will negatively impact their overall statistics. Read more on developing micro situations in our previous report. IT stocks may see muted performance till few more quarters but long term investors should ‘accumulate’ large cap names in tranche or through “SIP” suggests experts as stressed time is “best” to fetch “quality” stocks at cheap valuation.

For stocks, good price and good time seldom come together.

Disclaimer : All targets and ratings are given by expert analysts, brokering houses and rating agencies and not that of website. Please check with certified experts before making any investment decision.