Please welcome N V Chandrachoodamani, who joins PrimeInvestor as an equity analyst. Mani started his capital market career in mid 2000s with Equity Intelligence India and then worked with several capital market Intermediaries in various roles over the last 15 years. Most of his career experience has been in equity research and PMS. Most recently, he was with MOAT, a PMS firm. He is a graduate in mathematics, a post graduate in finance, and holds a CFP certification. Welcome Mani!
Although some of the top Tier IT companies such as Infosys or HCL Technologies missed market estimates for the quarter ending March 2021, they finished FY-21 on a strong note across various fronts. Steady deal wins, stable growth, sustained margins, expanding cash assets and buybacks characterized the fiscal ending March 2021 for IT companies. This, in a year ravaged by the Covid-19 pandemic. It is small wonder therefore that their price earnings valuations have moved up in trajectory, well-above their 10-year averages. Let’s take a quick recap of the performance for the latest fiscal and quarter – that led to PE moving to newer orbit. We’ve taken the 4 tech majors TCS, Infosys, Wipro and HCL Technologies for this purpose.
#1 Sound growth
IT Services is among the few sectors sector whose fortunes have changed favorably since the onset of the Covid-19 pandemic. The sector has been able to positively respond to the higher demand for digital services arising post the first wave of pandemic (pushed by the need to work from anywhere) – thus translating it to robust growth in FY-21, especially in 3rd and 4th quarters.
The data below provides the growth in key metrics for the full the financial year ending March 2021, over a year ago. You will see that the tech majors have managed to grow in a year fraught with challenges. And very importantly, the next table will show you that PBIDT margins have held up or even expanded, with lowered infrastructure cost since the onset of pandemic and growing revenue from digital transformation.
While IT companies enjoy good cash flows, top Tier IT companies has also improved their cash conversion as seen in their operating cash flow to PBIDT ratio given below.
#2 Strong deal pipeline built last fiscal
The Covid-19 pandemic has increased the urgency of digital transformation for enterprises across the globe, and this has positioned the IT sector to emerge as a strong growth story for the next 2-3 years. Several imperatives – enabling access for work-from-anywhere, shifting to cloud (and related cyber security and infrastructure management requirements), digitization of operations, plugging gaps in workflows – have all provided significant opportunities for IT companies across the spectrum. This has resulted in huge deal wins for companies as shown in data below.
Players like Infosys have seen very large deals like the Daimler contract while Wipro also sae large deals from Metro AG and Telephonica. HCL Technologies saw its fourth quarter bringing in new deal TCV of over $3.1 Billion – exceeding even Infosys and taking its TCV to an all-time high.
While IT as a sector has been generous in rewarding investors through periodic bonuses and high dividend payouts, they have also resorted to buy backs this year. These have also helped buttress valuations. Three out of the 4 companies have resorted to buybacks in times of market stress, thus holding prices up.
#4 Pay hikes and bonuses suggest momentum
All the Top tier IT majors have announced salary increments, variable pay, and bonus/incentives post second quarter suggesting that there is momentum in deal pipeline and execution. Sample these:
- After announcing a hike in October last year, TCS, in a matter of six months, once again announced increments for FY-22. The company had hiked salary by 6-8% in October but in the second rollout, reports suggest that employees will get an increment of around 12-14% effective 1st April 2021.
- Post its second quarter earnings, Infosys too announced rolling out salary hikes and promotions across all levels effective January 1, 2021. It announced 100% variable pay along with special incentives.
- Wipro announced wage hikes to junior employees with effect from January 1, 2021. It also added that all eligible senior employees will also receive benefits effective June 1, 2021.
- After crossing milestone of $10 billion in revenue for CY2020, HCL Technologies has issued a one-time special bonus worth around Rs 700 crore to over 1.5 lakh of its employees. The management further shared that increments and salary hikes will be rolled across the employee base as the company has done in the past.
All of these above, in a pandemic-hit year suggests that the companies are confident of deal wins.
#5 Valuations moving up
Apart from managing a rough year with elan, there is also another change underway that may be moving top tier companies’ valuations to newer orbits. According to Global IT research and advisory firm ISG, the digital transformation market based on technology (segmented into cloud computing, AI, big data and analytics, mobility/social media, cybersecurity, IoT, and others) is the fastest growing segment for IT services companies. It expects digital services to grow at over 20%, while pegging the same at 3% for traditional (legacy) services, for CY2021. Large Indian IT vendors are expected to be the key beneficiaries on the back of market share gains, vendor consolidation, and captive monetization.
Meanwhile, a recent NASSCOM-McKinsey report projects the Indian IT industry to touch the $300-$350 billion revenue over the next five years growing 10% a year, faster than the 7.5% growth rate registered over the last five years. This growth will be led by digital services, which currently accounts for 30% of the industry’s revenue, but expected to go up to 50% over the five years totaling to around $170 to $200 billion of revenue for the industry.
Top tier IT companies are now increasingly integrating ‘digital services’ into their mainstream businesses. TCS has stopped separately reporting digital services segment from the third quarter of FY-20, stating that with digital becoming increasingly a part of the traditional services, it has become harder to differentiate between digital and otherwise. This segment was last (quarter of Sep-2019) at about 33.2% of its revenue.
Infosys and Wipro continue to report digital revenues separately. Contribution of digital services to revenue has just jumped to 51.5% for Infosys at the end of FY2021 while it was 43.2% for Wipro. With digital becoming the main-stream growth engine for IT Services companies and the Covid-19 pandemic fast tracking this, the market appears to be recognizing the same through higher valuations. The below table will show you how price earnings ratio have seen a clear uptrend after almost trading like ‘value stocks’, especially in 2016-17.
For Prime picks in the tech space, check our Prime Stocks.
Useful Links :
TCS Quarterly Earnings Presentation
Infosys Quarterly Earnings Presentation
Wipro Quarterly Earnings Presentation
11 thoughts on “Results Update: Tech majors moving to a new orbit”
Heartiest welcome Mani !
Good article on four major IT.
I wish and hope a similar article on midcap IT companies such as KPIT !!!
Thank you sir
Hello the shares (IT sector) which are mentioned are they good if I accumulate them under sip for next 18 months and wait? I am planning to invest in small quantities. Thank you
Please refer to Prime Stocks for stocks we have buy recommendations on. – Thanks, Bhavana
Welcome Mani. A very interesting sector to pick and agree that pandemic has become a catalyst for all the major IT companies. Is it possible to write an article focusing on IT companies in mid/small-cap space like OFSS or Happiest Mind?
Welcome Mani, You touched upon an interesting sector who is set to benefit from the pandemic. As a part of the IT industry I can feel the changes on the ground but your analysis at a macro level helps to get a good insight
Thank you sir
Welcome Mr Chandrachoodamani. Hope to see many more good writeups from you.
Thank you sir
Hello Chandrachoodamani, on the first note here’s wishing you the best for your time at PrimeInvestor.
Whilst this report well elucidates how the trajectory has moved up for IT firms, it appears to be a movie with an open ended climax. What are the suggestive actions from your end basis the presentation of this info. Thanks.
This is only a general result update
But, we have a pick from this space and the link to it is added at the end of the article
Kindly go through it
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