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IT stocks in limelight after Q2 results. Wipro, Mindtree shares hit new highs

Investors are broadly pleased by the Q2 show of Infosys, Wipro and Mindtree with the last two companies' numbers coming in relatively better.

October 14, 2021 / 01:54 PM IST
Representational image

Representational image

The shares of Infosys , Wipro and Mindtree rose in the morning trade on Thursday on the National Stock Exchange (NSE) increasing by around 2 percent, 8 percent and 13 percent, respectively. What’s more, shares of Wipro and Mindtree also made new 52-week highs.

The three information technology (IT) services firms announced their September quarter (Q2FY22) results on October 13. Investors are broadly pleased by the Q2 show of these companies with Wipro and Mindtree’s numbers coming in relatively better. “The sharp jump in Mindtree’s shares can be attributed to a much bigger beat at the earnings before interest and tax (Ebit) level leading to higher earnings upgrade for the stock,” said an analyst requesting anonymity.

Also read: Infosys: Buy, sell or hold the stock after Q2 earnings?

As such, many analysts have raised their earnings estimates after the results of the three companies. For instance, Motilal Oswal Financial Services has upgraded their earnings estimates for all the three firms. The broker has upgraded its FY22E/FY23E earnings per share (EPS) estimate for Mindtree by around 7 percent as growth estimates increase on the back of a beat in Q2 and strong management commentary for FY22E. E stands for estimates.

Commenting on Wipro, Motilal Oswal’s analysts said: “We upgrade our FY22E/ FY23E EPS estimate by 7 percent/ 2 percent to factor in a better growth performance.” On Infosys, the broker has said, “We have increased our FY22E EPS estimate by 2 percent on stronger than expected performance in Q2. However, our FY23E EPS estimate remains unchanged.”

Close

Sequentially, revenues of Infosys, Wipro and Mindtree increased by 6.3 percent, 8.1 percent and 13.4 percent, respectively, in constant currency terms. For Infosys, the growth was broad-based across geographies and segments with the largest geography, North America growing at 23.1 percent and the largest segment, financial services growing at 20.5 percent, year-on-year in constant currency. Note that Infosys has revised its revenue guidance for financial year 2022 upwards to 16.5-17.5 percent. The company has retained its margin guidance at 22-24 percent.

In its Infosys results review report, JM Financial Institutional Securities said: “While the large deal bookings were down quarter-on-quarter (along with a higher share of renewals yet again!), we reckon that the underlying metrics around hiring and the offshore shift apart from qualitative commentary on demand provide confidence in overall sector growth prospects.”

The broker added, “Infosys is set to outperform Tata Consultancy Services Ltd (TCS) on revenue growth for the third year in a row and the outperformance on sequential growth rates is going to increase the clamour on the relative valuation differential trade.”

Meanwhile, Wipro’s December quarter (Q3FY22) revenue growth guidance stands at 2-4 percent on a quarter-on-quarter basis. The guidance is in keeping with expectations.

Overall, the three firms have performed well on the margin front despite the pressure from higher wage costs. Wipro’s Ebit margins were flat quarter-on-quarter at 17.8 percent adjusted for one-off gains. Infosys’ Ebit margin was resilient as well, contracting just 10 basis points (bps) sequentially to 23.6 percent. One basis point is one-hundredth of a percentage point. Mindtree saw a sequential expansion of about 50bps in its reported Ebit margin to 18.2 percent.

On the flip side, analysts reckon Wipro’s cash generation hasn’t been particularly encouraging during the quarter. Additionally, margin performance remains a key moniterable for IT companies in general, going ahead. Even so, it’s worth noting that investors in these stocks are sitting on handsome gains so far this calendar year.

So how do valuations stack up?

As such, valuations of these stocks are not cheap. “Overheated and life-time high valuations of many stocks more than capture the near-term strength / predictability in earnings,” said analysts from ICICI Securities Ltd in a report on 14 October released before the markets opened.

The broker points out, “Mindtree is now trading at 47 times 1-year forward P/E (consensus) versus pre-covid long term average of 15 times. Similarly, Wipro is now trading at 29 times versus pre-covid long term average of 15 times. Even as Infosys too re-rated significantly (now at 30 times versus historical average of 17 times), we believe this is more sustainable given the growth leadership position the company regained and relatively more durable demand.”
Pallavi Pengonda
first published: Oct 14, 2021 01:54 pm

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