The Q2FY22 earnings season is upon us and smart investors are likely to take note of hits and misses more carefully this time. Are you wondering why?
Well, now that markets have rallied almost vertically and valuations have soared; the focus is likely to shift to performers from storytellers. On this backdrop, Q2FY22 results hold the key.
India’s largest technology company TCS is scheduled to announce its September quarter results on October 08, 2021. TCS will set the tone for other IT majors as well.
Until a few years ago, IT was considered as an export-driven, value-oriented defensive sector in India. Tech giants such as TCS, Infosys, Wipro and HCL Technologies were well-known for their ability to generate free cash flows. But the on-going coronavirus pandemic changed the entire equation. The defensive IT sector suddenly became the major driving force for Indian markets.
Indian IT companies witnessed an impressive jump in earnings over the last 6-8 quarters. As a result, their stock market performance has remained equally impressive.
Now the moot question is whether the re-rating of Indian IT companies will continue beyond Q2FY22 earnings season? And it remains equally interesting to see whether the IT sector continues to outperform or becomes a market performer.
In the quarter gone by, some leading IT companies beyond the top-4 rallied harder in anticipation of sustained earnings growth.
Careful evaluation of stock price performance and expected earnings growth in Q2FY22 reveals that companies that have rallied the most are expected to declare better earnings and vice-a-versa.
Thus, the performance pressure is building up on companies that have rallied the most. Dwelling deeper on valuations, firms that are expected to put up an impressive show this season have witnessed a massive PE expansion already.
And at this stage it looks like investors have started chasing earnings momentum.
As you might be aware, low valuations and earnings expansion are two crucial driving forces for any stock. As far as Indian IT companies are concerned, the chances of further PE expansion look remote and the stock prices will now be largely dependent on earnings performance.
Companies that are enjoying expensive valuations will have to please markets with a high-voltage performance. On the contrary, those which are expected to report weak earnings in Q2FY22, and are available at moderate valuations might surprise investors if they can post better than expected numbers. Also pay attention to profit margins—markets have assigned higher multiples to companies enjoying better margins—TCS and Tata Elxsi, for instance.
Speaking specifically about Q2FY22 earnings of IT companies, be wary of stocks that may languish post earnings despite posting strong quarterly performance. That’s perhaps a sign of tiring bulls. Conversely, if investors continue to chase expensive stocks posting extraordinary numbers, valuations may not cool off.
You don’t have to do anything extraordinary. Our various initiatives can collectively help you not only decipher quarterly results but also take well informed decisions regarding your portfolio.
Be ready with your checklist: Before the results are announced, you should know what factors to watch out for. Please remember markets can quickly adjust themselves for surprises— both positive and negative. Our blog posts and informational updates pushed through Ventura Wealth App can help you prepare your checklist before the earnings results are announced.
Separate the wheat from the chaff: Stock markets can go up in anticipation of better future outcomes but they demand performance to sustain in the long run.Thus you should carefully choose stocks for your portfolio.
Do follow our research reports, earnings updates and notes on important market events to take charge of your portfolio. For instance, our research team had recommended HCL Technologies on September 02, 2020 at Rs 704. The stock exceeded the expectations of our research team thanks to an unprecedented rally in IT.
Understand the market cues: Our technical exert often discusses interesting stock ideas on our Youtube Channel, in a series dedicated to momentum stock ideas—Stock Talk with BKG. For instance, Coforge was discussed on September 28, 2020 when the prevailing market price was Rs 2,315. This too exceeded the expectations. Again, the strong undercurrent in the IT sector helped.
The intent of discussing these examples isn’t to pat our own back but to highlight how one could take advantage of opportunities without preempting anything.
The earnings season is an important phase for markets when intelligent and smart investors are most active. Thus, instead of chasing returns, your goal should be to acknowledge risks and take advantage of opportunities.
You may also like to read: 2 most important factors that stock market investors should track now
Disclaimer: The blog is for information purposes only and shouldn’t be construed as part of or an extension to any stock recommendation made by Ventura Securities on any of its properties in the past or that it may make in future. Moreover, the sector and stock specific references made herein are incidental to presenting the relevant information about quarterly earnings, and do not implicitly suggest anything.
The information presented in the blog 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.
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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 conflict 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.