Is the second wave going to give a second chance to the bulls of Dalal Street?
Amidst the flurry of rising cases, potential shortage of vaccines, COVID-inappropriate behaviour by a large number of citizens, the markets have been extremely choppy these days. As far as businesses are concerned, the tiny creature isn’t unkind to all.
Ever since the coronavirus pandemic has rocked the world upside down, digital adoption has zoomed, resulting in technology companies making fortunes, globally. Some are calling them islands of growth while others are terming them torchbearers of the post-pandemic era.
When defensives take the front seat in earnings recovery, markets have no option but to take note and account for the change.
In the Indian context, leading IT companies are largely export driven and qualify to be in the league of defensives, historically, thanks to their sound business models, high revenue visibility, structurally low-leveraged balance sheets and so on.
Over the last one year, Indian IT stocks got majorly re-rated, which reflects in their current Price-to-Earnings (P/E) ratios quoting at a significant premium to their 5-year median P/Es.
Market price is the closing price as on April 12, 2021
P/E, sales growth and net profit margins are Bloomberg consensus estimates
(Source: Bloomberg, BSE)
Markets have been expecting stellar numbers from leading IT companies over the next few years as well. The companies expecting to clock a higher sales growth and the ones enjoying better net margins have attracted premium multiples.
Thus, companies posting better than expected quarterly performance may continue to remain in the limelight.
TCS kickstarted the Q4FY21 earnings season and reported impressive numbers. Its profit grew 14.9% Year-on-Year (Y-o-Y) and 6.2% Quarter on Quarter (Q-o-Q). Despite the upbeat commentary by the TCS management, the initial reaction of the stock market hasn’t been encouraging.
On this backdrop it is interesting to see how other leading IT companies perform.
Our technical experts see a 30%-45% upside potential (over the recommended price) in two IT companies—Tech Mahindra and Tata Elxsi. Recently we discussed these two companies in a video series—Stock talk with BKG—which focuses on momentum stock ideas.
Top 20 clients account for 31% of Tech Mahindra’s top line and 94% of its clients give repeated business; thereby indicating low revenue concentration and higher customer satisfaction. Tech Mahindra’s investments in R&D, product development and platforms, as new service offerings, are likely to fetch good results in future.
The company had reported a quarterly PAT of over Rs 100 crore for the first time in Q3FY21. In a conference call post earnings, it had indicated that it would carry this momentum in the coming quarters.
Tata Elxsi and Tech Mahindra are expected to declare their results on April 22, 2021 and April 26, 2021, respectively.
Markets have lots of expectations from IT companies in Q4FY21 and beyond. It’s difficult to estimate how much of the good news is already in prices. Thus, instead of following your conviction, it’s far better to listen to the markets and keep a hawk’s eye on fundamental developments.
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