The IT industry has been and will continue to be an attractive option for investors due to the good returns it has given in the past and the potential to give better returns in the future. This sector will always remain the favourite with the investors because of the ability to give good RoI.
Sector As a Whole :
IT industry is another export oriented industry which again comes with all the associated advantages. IT Industry has been the foremost beneficiary of rupee depreciation and market polarisation during the last 6 months. IT industry has emerged as an attractive option for investors, both domestic and FII, in tough economic times to gain good returns on investments.
Some Performance Glimpses :
| TCS | Infosys | HCL Tech (Jun is Closing qtr for FY) | Tech Mahindra | |
| Revenue in $ | 5.43% inc QoQ 17% inc YoY |
3.8% inc QoQ 15% inc YoY |
3.5% inc QoQ 14.1% inc YoY |
4.7% inc QoQ 17.6% incYoY |
| Profit in $ | 12% inc QoQ 16.33% inc YoY |
8.4% dec QoQ 11.1% dec YoY |
6.6% inc QoQ 42.8% inc YoY |
36.4% inc YoY |
| Revenue in Rs. (Cr) | 20977 vs 17987 QoQ 16.6% inc QoQ 34.3% inc YoY |
12965 vs 11267 QoQ 15.1% inc QoQ 31.5% inc YoY |
7961 Q1 vs 6980 Q4 of prev FY 14% inc QoQ 31.2% inc YoY |
4771 vs 4103 QoQ 16.3% inc QoQ 35.4% inc YoY |
| Profit in Rs.(Cr) | 4702 vs 3796 QoQ 23.9% inc QoQ 33.9% inc YoY |
2407 vs 2374 QoQ 1.4% inc QoQ 1.6% inc YoY |
1416 Q1 vs 1194 Q4 of prev FY 18.7% inc QoQ 63.8% inc YoY |
718 vs 686 QoQ 4.7% inc QoQ 57% inc YoY |
| EBIT Margin % | 30.1% Q2 | 21.88% Q2 (dec by 500bps YoY) | 23.8% Q1 vs20.71% Q4 of prev FY | 20.7% Q2 vs 18.21% Q1 |
From the table we can see that TCS has established itself as the new standard for the IT industry from the last several quarters taking from Infosys, its position of bellwether. Indeed TCS has become the most valued company in India surpassing RIL valuation.
Presently the sector is attracting huge valuations because it is immune to domestic economic problems. The sector is benefiting more because there are early signs of recovery in US economy. This is one sector which will be impacted positively by any QE taper talk.
Infosys, it seems, has finally put an end to its troubles and able to show some business expansion QoQ in Dollar earnings. It has been enjoying benefit-of-doubt by the investors for the last several quarters. As they have demonstrated their ability in the last quarter, there is some possibility of valuation upgradation provided the performance remains consistent in the coming quarters.
Tech Mahindra has emerged as a big player in the IT industry after the completion of the merger process with erstwhile Satyam Computers. The combined entity has emerged as the fifth largest company as per revenue and market cap showing enhanced capacity for bigger clientele and combined domain expertise. This stock may also undergo some valuation expansion in the coming months.
Key Takeaways :
The industry will continue to be the double beneficiary of rupee depreciation and margin expansion with better pricing power which has been demonstrated both by TCS which is the leader and Tech Mahindra which is the new entrant in the big club. Good performers in the sector will continue to enjoy valuation and earning upgrades in the coming quarters.
Though good companies always demonstrate themselves with consistent performance, forex hedging risk as a function of rupee valuation is always present with them. As rupee depreciation has benefited the industry, so the appreciation of the rupee is bound to have an opposite effect. Stable currency is a boon for this sector because of the predictability it offers. The volatility of the currency presents significant risk to the industry as the rupee appreciates and should be kept in mind to time the investments.
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