Recovery may be underway; but markets might be reflecting it already

These are the early days of Q2FY21 result season. It may take a while to ascertain the general direction of corporate earnings in the unlock quarter. But, going by the experience of IT companies that have declared quarterly numbers so far, it looks like investors would be better off if they juxtapose Q2 results with the stock market performance of companies—pre as well as post earnings.  

Tech stokes…

TTM: Trailing Twelve Months
(Source: ACE Equity)

IT companies have been in vogue ever since the pandemic broke out. During the initial phase of lockdowns, investors latched onto them as defensives. Later, they were looked upon as the major catalyst of technology transformation in the post pandemic era.

IT companies went into Q2FY21 result season with hefty gains of 25%-90% from their March lows. And despite posting impressive numbers in the quarter gone by, Indian tech stocks have so far been showing signs of fatigue.

Bought the rumour now selling the news?

Value of Rs 10,000 invested as on January 01, 2020
Data as on October 16, 2020
(Source: NSE, ACE Equity)

Earnings highlights

• Digital offerings of Infosys witnessed 25.4% growth on a Y-o-Y basis, which now contribute 47.3% to revenues.
• Embedded Product Design (EPD) segment, which is the mainstay of Tata ELXSI with 90% contribution in the revenue, registered a Y-o-Y growth of 7.7% in Q2FY21. Interestingly, within the EPD segment, the revenue from healthcare EPD business witnessed a 14.1% growth Q-o-Q and 50% growth Y-o-Y.
• According to Intelligent Enterprises Report published by Wipro, 95% of business leaders acknowledged the crucial role AI can play in their business, yet just 17% actually leveraged it across their organizations.
• Wipro’s health business unit reported an impressive 40% growth in net profit. As a result, the contribution of Health BU to the company’s bottom line jumped from 11% in Q2FY20 to 14% in Q2FY21.
• Mindtree reported the revenue contribution from 4 of its service lines as: Customer Success: 39%, Data and Intelligence: 14%, Cloud: 19%, Enterprise IT:28%.  The company won new orders of USD 303 million and 694 million in H1FY21. In other words, new order wins fell 23% on a Q-o-Q basis.   
• Retail and Consumer Packaged Goods (CPG) segment of TCS clocked an impressive 8.8% growth while revenue from the healthcare vertical grew 6.9%. With 20% sequential growth, India was the fastest growing market for TCS in Q2FY20, on a smaller base though.
• TCS remained hopeful that the impact of H1B restrictions would be transient and may not have long term ramifications for the company’s business in the U.S. The company expects a double digit compounded annualized growth in its revenues and expects operating margins to revolve around the current margin of 26.2% in the foreseeable future.
• During the quarter gone by, TCS inked a deal with a global pharma major, which will enable the latter to transform its digital marketing drive and also streamline and localize brand communications across digital channels.
• Toyota Motor, North America, chose India’s largest technology company as its strategic partner to improve customer experience and attain efficiencies in Q2FY21.
• A biotech subsidiary of an MNC healthcare company hired TCS to enhance its ability to offer timely, personalized and appropriate treatment.

The entire global healthcare ecosystem seems to be substantially investing in technologies to improve in the areas of diagnosis, seamless healthcare delivery and real-time monitoring, amongst others. Moreover, the export data for the month of September reflects a 24% jump in the exports of drugs and pharmaceuticals. On this backdrop it remains to be seen how India’s export-oriented pharma companies have done in Q2FY21.

The likes of TCS winning contracts from automotive companies in the overseas markets and Tata Elxsi reporting a positive growth in the transportation EPD business, and back home auto ancillary companies posting satisfactory numbers hint at a revival in the automotive industry. Whether it can sustain is a million-dollar question.

Out of auto ancillary companies that have declared their Q2 numbers so far, Steel Strips Wheels, GNA Axles and Rane Brake Lining stood out by clocking 82.4%, 2.9% and 54.7% profit growth, respectively, on a Y-o-Y basis.  

In Summary

The revival might be underway and as the earnings season progresses the shape of the recovery curve will become clearer. Under such conditions, it remains crucial to see how much of the economic and earnings recovery is already factored into stock prices. Post-result stock price performance of IT companies suggests that there will be a performance pressure on companies that have experienced stupendous rallies since March 2020.

The market’s honeymoon period is over. Its tryst with earnings will continue!    

Please Note (read as a disclaimer): None of the stocks discussed in the article are recommendations to buy, hold or sell. This could just be the starting point for deeper analysis that you might want to carry out on your own. You may also take professional help as you feel appropriate.

Want to look at an interesting stock that you may consider for your portfolio post-earnings?  Watch this video

You may also like to read our detailed Q2 earnings coverage

Infosys

TCS

Wipro

Disclaimer

We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:

Consult your financial advisor before taking any investment decision.

We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflicts of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.