IT majors, TCS and Infosys have kick-started the earnings season, on a very subdued note. Arguably, Infosys reported numbers that were more or less in line with estimates. TCS on the other hand was slightly worse than expected, and the CEO too expressed surprise at the Q2 performance.
Commenting on the Q2 performance, N Chandrasekaran, CEO and MD, TCS, said, "It has been an 'unusual Q2' for TCS. Growing uncertainties in the environment is creating caution among customers and resulted in holdbacks in discretionary spending this quarter. However, let us seen what do you do with the stock of Infosys.
The numbers first
You really cannot find too much fault with the numbers and they were or less in line with expectations. Infosys reported a net profit of Rs 3,603 crores for the quarter ending Sept 30, 2016, as against expectations of around Rs 3,500 crores. The consolidated EBIT margin was placed at 24.9 per cent, which was once again better. Dollar revenues was at 2587 million for the quarter ending Sept 30, 2016. In fact, dollar revenues, which is always a much anticipated number was up 3.4 per cent, while the volume growth was at 4%. No doubt that it was a stable quarter for the company.
Infosys and TCS the quick comparison
If you compare the results of Infosys and TCS, you would soon realize that Infosys is beginning to perform much better. While Infosys saw revenue grow by 8.1 per cent, TCS saw revenues grow by 5.2 per cent. Even in terms of net profit growth, Infosys performed much better. In fact, the trend for TCS, quarter on quarter, is much worse than for Infosys. However, in the past we have seen one does better than the other. It is all a careful analysis of the results quarter on quarter.
Share price movement?
Ironically, a day after TCS announced its results, the share price rallied, while Infosys dropped on the day of the results. Infosys dropped, following a lower constant currency growth guidance. TCS rallied, since the stock had seen large scale selling pressure a day ahead of its results. Check Infosys stock quote here
Constant currency guidance a worry for Infosys
Infosys revised its guidance in constant currency terms to 8-9 per cent. The company had already lowered its revenue guidance to 10.5 percent-12 percent in constant currency from 11.5-13.5 percent in the last quarter. The revision clearly signifies that there are client spending pressures and TCS had rather clearly indicated that, when the company declared its results on Thursday evening. This is the second straight quarter that Infosys has cut guidance and this was the biggest factor for the stock crash today.
Worrying trend for the IT sector
Andy Mukherjee writing for Bloomberg had this to say in his article. "The first hint that the end was near came on Thursday when Tata Consultancy Services, the biggest Indian software vendor by market value, announced a virtual stalling of its business in the September quarter from the previous three months. After Infosys followed up by slashing its full-year revenue guidance for the second time in three months, it was time to turn off the ventilator." That sounds more like a doomsday scenario scenario, for those who believe that companies have not embraced digital technology quickly.
Should you buy the stock?
The company reported an EPS for the quarter ending June 30, 2016, of Rs 15.77. It is highly possible that it can report an EPS of close to Rs 62 for the full year 2016-17. This makes the stock not very expensive at under 17 times, one year forward earnings. However, given what is happening in the IT sector, betting on these stocks is becoming a bit risky.
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