Contrasting Q2 stories of two tech giants of India

Wipro disappointed on the margin front. Its earnings before interest and tax (Ebit) margin were hit by wage increases. Photo: HT
Wipro disappointed on the margin front. Its earnings before interest and tax (Ebit) margin were hit by wage increases. Photo: HT


  • Wipro has to face more challenges in a slowdown but HCL Technologies would also be hurt if a recession occurs.

Information technology (IT) services provider Wipro Ltd’s stock closed 7% lower on Thursday. On the other hand, shares of competitor HCL Technologies Ltd rose 3%. The Street’s response comes after the two companies announced their September quarter (Q2FY23) results on Wednesday post market hours.

Wipro disappointed on the margin front. Its earnings before interest and tax (Ebit) margin was mainly hit by wage increases during the quarter. However, sequential constant currency (CC) revenue growth at 4.1% was in line with expectations. Commentary from Wipro’s management was cautiously optimistic. However, as is evident, investors aren’t convinced.

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“Wipro’s turnaround story is faltering," said analysts at Ambit Capital Pvt. Ltd. According to the broking firm, this is because of various factors, such as Wipro’s organic growth normalizing to around 1-3% on a quarter-on-quarter (q-o-q) basis over the last four quarters. Plus, its large deal wins are sluggish. Third, “Overall Ebit margin has fallen 720 basis points from the Q3FY21 peak to a historical low of 14%, with no material improvement indicated in near term," said Ambit’s analysts in a report on 13 October. So, Wipro’s lag on growth versus peers, margin dilution, and lowest cost of equity among tier-1 IT, strengthen the case for higher valuation discount to peers, Ambit said.

In contrast, with its stellar Q2 earnings, HCL is inching a step closer to bridging the valuation gap with peers. The FY24 price-to-earnings (PE) multiple for HCL is 16.5x, a discount to tier-1 competitors Tata Consultancy Services Ltd (TCS) and Infosys Ltd, showed Bloomberg data. In Q2, HCL’s Ebit margin rose sequentially, led by an improving employee pyramid and other efficiency measures. Its CC revenue grew 3.8% sequentially in Q2. HCL raised its FY23 CC revenue growth guidance to 13.5-14.5% from 12-14% earlier.

Wipro has guided for revenue growth guidance of 0.5-2% for Q3FY23. Analysts at Kotak Institutional Equities find this guidance muted and believe it captures slowdown in consulting and some bit of caution is baked in for a deteriorating macro. “Wipro will have to deal with more challenges in a slowdown given it is in the midst of a turnaround journey, has higher discretionary exposure and additional effort on integration of acquisitions," said the Kotak report on 12 October.

Company specific factors apart, while HCL’s Q2 results are comforting, for investors in shares of IT companies, the threat of a recession looms large. If that were to play out, HCL would be adversely affected as well.

“In the area of cost optimization, HCL is up against the entire Tier-1 peers and multinational company players and, as macro deteriorates, we see clients wanting to squeeze pricing on this part of their spend," said analysts at Nirmal Bang Institutional Equities. HCL will also feel the negative impact of the stagflationary environment developing in the western world, which will likely affect tech spending in FY24, said the Nirmal Bang report.

Against this backdrop, the street’s response to TCS’ Q2 earnings was lukewarm though the IT bellwether beat consensus expectations on revenue growth and margin. Therefore, unless more clarity emerges on FY24 revenue visibility, IT stocks are unlikely to see a meaningful rebound. In CY22 so far, the Nifty IT index is down 29%, sharply underperforming the Nifty 50 index. Valuations have come off. “Still, in the ongoing uncertain environment globally, a further moderation in FY24 PE multiples of tier-I companies cannot be ruled out," said an analyst with a domestic brokerage house requesting anonymity.

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