The June quarter scorecards of IT players have broadly been able to meet the expectation of the market even as the pressure of COVID-19 was visible, industry experts said.
The companies have seen sharp sequential revenue declines in June 2020 quarter, but most of them are hopeful that revenues will start growing sequentially from September 2020 quarter onwards as customers learn to live with the new normal.
TCS reported a 13.8 percent year-on-year (YoY) fall in Q1 profit, partially impacted by a 67.8 percent YoY decline in other income to Rs 456 crore.
On the other hand, Infosys posted an 11.5 percent YoY growth in net profit at Rs 4,233 crore while Wipro posted a flat 0.11 percent YoY growth in net profit at Rs 2,390.40 crore.
HCL Technologies posted a 31.70 percent YoY rise in net profit at Rs 2,925 crore and Larsen & Toubro Infotech posted a 17.06 percent YoY growth in its June quarter net profit at Rs 416.4 crore.
Bumpy road ahead
While the Q1 numbers showed the impact of coronavirus pandemic, the management commentary too hinted that the challenges will persist in the coming quarters too.
Analysts at Emkay Global Financial Services pointed out that the risks from the second wave of COVID-19 could possibly spoil the consumer and business sentiment in the US which may have a ramification on client IT spending.
Princy Bhansali, Research Analyst at Anand Rathi Shares and Stock Brokers underscores while the IT sector has shown that variable cost structures and agility are strategic advantages, revenues reflect weakness in the external environment.
"Most of the earnings surprises have been therefore margin driven (employees have limited bargaining power at present) and the fastest-growing companies of the industry are at 2-3 percent. As we expect normalcy to return over the next three quarters, some of the costs are also likely to come back and currency may not lend support to the extent as it has in Q1," Bhansali said.
"Also, in a competitive global industry operating in a low growth environment, one can expect price discounts to gain market share which in turn will take margins back to FY20 levels. Protectionism across the globe may also increase operating costs for many of these companies," Bhansali added.
Valuations a concern
The sector has bounced back after the steep correction through the mid-Feb-late March timeframe along with the overall markets as well.
Brokerage firm Emkay Global underscores that prices of most stocks are at or above the pre-COVID level (January/February 2020 levels) while there are EPS cuts for FY21 and FY22.
"In fact, valuations are above mean levels, but that may be true for the markets as well. Valuations may limit absolute upsides in some names certainly," Emkay said.
Bhansali of Anand Rathi also finds valuations a concern.
"We do see valuation as a concern for the IT sector. If we zoom out six months (Feb to July 2020), in some sense, we have started valuing significantly lower growth at a 10-15 percent premium (July versus February) which is a cause of concern," Bhansali said.
"We do not see upsides for many of the names at current levels from a 12-month investment perspective. Given our expectations from the sector, we would prefer value over the growth," Bhansali added.
Stocks to look at
Emkay's top picks among Tier-I are HCL Tech, Infosys and Tech Mahindra, in that order, and among mid and small-caps are Persistent Systems and Birlasoft.
The brokerage said it would not be surprising if stocks take a breather and see some correction given the steep up-moves in the recent past.
The analyst of Anand Rathi prefers Mphasis and Sonata Software.
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