The performance of information technology (IT) stocks in the past two weeks tells the story of investors’ expectations from the June quarter (Q1) earnings season. Tata Consultancy Services Ltd (TCS) has led the recent rebound in share prices with an 11% gain. Infosys Ltd and HCLTechnologies Ltd followed with a 9% gain; among large-sized companies, Wipro Ltd recorded the lowest gain of 5%.
This is almost exactly how expectations from the June quarter results also stack up. Among firms listed in India, TCS is expected to lead in terms of revenue growth, with a sequential increase of 6-7% in dollar terms. HCL and Infosys are expected to grow by 5-6% and 4-5%, respectively, while Wipro may end up with revenue growth of as low as 1%.
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Thanks to the recent bounce in stock prices, the TCS valuation has risen to almost 23 times estimated March 2012 earnings. The stock has outperformed peers not only in the past two weeks, but for months now, owing to superior earnings growth. But at current valuations, the upside seems limited, unless of course growth is much ahead of the Street’s expectations.
Another factor that could hook investors will be positive commentary on pricing. Nomura Research says: “Without significantly beating our 6% quarter-on-quarter expectation for revenue growth and visibility of material pricing momentum (an area where pricing commentary of management has turned more sober over the past three quarters), we believe the stock might start to underperform on already high Street expectations.”
With Infosys, on the other hand, expectations have been running relatively low. The company has already been trailing TCS in terms of earnings growth and analysts expect the trend to continue. The recent restructuring at the firm is expected to play spoilsport. Also, because of the increase in macroeconomic uncertainty of late, not many analysts are expecting the firm to raise its annual revenue forecast. As a result, the company doesn’t have to do much to spring a positive surprise.
With HCL, expectations on revenue continue to remain high. But the company’s valuation has been affected owing to a lacklustre performance on the margin front. Expectations from Wipro are running extremely low owing to the recent transition in leadership and the fact that it will take some time before the new team can produce results.
Overall, though, revenue growth is likely to be fairly good for the industry, with even some mid-sized firms expected to report decent growth. Needless to say, profit growth won’t follow suit owing to wage hikes in April. Most of these factors seem to be captured in the current share prices and unless there is a positive surprise in the form of higher-than-expected revenue growth, or an upward revision in the Infosys guidance, IT shares should continue to track the broader market.
Graphic by Yogesh Kumar/Mint