Nifty IT Index up 4.8%, hits 52-week high; Infosys rises 7%, TCS 4%

Nifty IT Index gained more than 4% in the morning trades on Friday post results declared by Tata Consultancy Services and Infosys on Thursday.  The results came, after the market hours. The Nifty IT Index also scaled 52-week highs with  Infosys seeing its share price rise more  than 7% while TCS share price was up almost 4%. 

The expectations from IT companies had remained subdued during the December quarter . The impact of rise in furloughs, weak macros, wage hikes  weak demand environment were expected to weigh on their earnings..

The impact was visible , nevertheless the earnings performance by Infosys and TCS came in line or better than analysts expectations.

Earnings performances in-line or better than expectations

Infosys reported consolidated net profit of ₹6,106 crore, declined over 7 percent from ₹6,586 crore in the year-ago period. Its consolidated revenue could just grow1.3 percent to ₹38,821 crore versus ₹38,318 crore in the same period last year.

Analysts at Jefferies India Pvt Ltd post results said that the revenues and margins beat expectations while Infosys net profit was better than expectations. 

Infosys' 3QFY24 revenues of US$4.7bn, declined 1%  in constant currency terms, which as per Jefferies beat their and consensus estimates despite the one-time impact of the cybersecurity issue at McCamish. Earnings before interest and tax (Ebit) margins at 20.5%, declined 70bps sequentially, however were also ahead of Jefferies estimates, partly due to lower costs. Profits, were in line with estimates, due to higher than expected tax rate which offset the Ebit beat, said analysts at Jefferies

Also read- Infosys share price jumps over 6% on better-than-expected Q3 results; Brokerages raise target price; Should you buy?

The TCS' revenue of $7.3bn, up 0.9% sequentially too came largely in line with Jefferies estimates. EBIT margin at 25%, rose 70bps sequentially was slightly ahead of Jefferies estimate and was a key positive surprise. Profits at Rs111 billion ( ₹11097 crore), up 2% YoY was in line with estimates due to higher than expected exceptional items related to legal settlement.

The analysts at Numama Research said that TCS delivered Solid revenue beat while margin performance exceptional.

Modest deal wins -But impacted by seasonality

The deal wins for TCS remained modest at at $8.1billion (27.7% lower sequentially,  up 3.8% YoY), which analysts attributed mainly to seasonality. Analysts at Nuvama said that, Management continues to see the same demand environment as last quarter. It, however, believes the BFSI vertical has bottomed out for it, and expects positive momentum in Q4. This, analysts believe, is a big positive read across for the entire sector, with BFSI being over one-third of revenue for almost all companies.

On Infosys that reported TCV of $3.2 billion (57.8% lower sequentially, and 1.8% lower YoY) analysts at Nuvama said that these were modest, but looks optically lower due to higher furloughs (YoY) and highest-ever deal wins in the previous quarter.

Also Read- TCS Q3 Result: Share price jumps 4% as investors give thumbs up; buy, sell or hold?

Analysts maintain positive outlook

Infosys also tightened its FY24 revenue growth guidance from 1-2.5% earlier to 1.5-2.0% now. However analysts at Jefferies said that narrowed FY24 growth guidance, broadly is inline with its 9MFY24 growth. Its revised guidance implies -1.9% to 0.1% sequentially in constant currency growth in 4QFY24. This along with a sharp 6.1K decline in headcount suggests that demand outlook is unlikely to improve in FY24. However, strong deal wins should support growth in FY25. They thereby have raise their revenue estimates by 1% and expect Infosys to deliver 7.8% cc revenue Cagr over FY24-26.

Those at Nuvama said that “We see Q3FY24 to be the bottom for the earnings downgrade cycle for Infosys and the sector”

Analysts at Motilal Oswal Financial Services said that “We view Infosys as a beneficiary of acceleration in IT spending, given its capabilities in Cloud and Digital transformation areas” they maintained their Buy ratings

For TCS , analysts at Jefferies expect Earnings per share to rise 10%  CAGR (compound annual  growth rate)  over FY24-26.

Those at Nuvama Research said that they expect the strong deal wins of the last few quarters for the sector  to gradually convert into revenue in coming quarters, even as the US macro becomes favorable. They see TCS as a perfect largecap proxy to play this upcycle

Analysts at MOFSL on the other hand have kept their FY24 EPS estimate unchanged but have raised FY25-FY26 EPS estimates by 2.0% for TCS. Over FY23-26, they expect a  revenues in dollar terms to rose at a  CAGR of 9% and in rupee terms earnings per share to rise at CAGR of 14%.

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