Street upgrades earnings, target prices of TCS, Infosys

Upsides for Wipro is least among the three IT majors

Barring Wipro, which was the top loser among Sensex stocks, shedding 6 per cent on Thursday, brokerages have given the thumbs up to the results of India’s tier-1 IT services companies.

Stocks of Tata Consultancy Services (TCS) and Infosys were up a per cent each as analysts upgraded their earnings estimates and target prices. While Infosys beat expectations across most parameters and was the only one to do so, TCS had a mixed bag. Wipro lagged the market leaders, undershooting expectations across key metrics.

Infosys delivering a constant currency revenue growth of 7 per cent in the third quarter (Q3), twice what the Street expected. The management has upgraded revenue growth guidance for financial year 2021-22 (FY22) to 19.5-20 per cent, against 16.5-17.5 per cent earlier.

Motilal Oswal Research has raised the firm’s earnings estimates by 3-4 per cent for FY23 and FY24. It expects the earnings multiples to converge with those of market leader TCS. At 26 times its FY24 earnings estimates, Infosys trades at a 9 per cent discount to TCS. Given the target price, Infosys has the highest upside among the three of 23 per cent.

While TCS’ numbers were better than estimates on the revenue front, with sequential constant currency growth of 4 per cent, its operating profit margins at 25 per cent were 100 basis points (bps) lower due to supply-side challenges and higher subcontracting costs.Analysts at Emkay Research have lowered their FY22 earnings estimates by 1.5 per cent, while marginally increasing them for the next two fiscals by 0.2-0.5 per cent. They have a target price of Rs 4,150, valuing the company at 30 times its December 2023 earnings estimates. The upside for the stock is pegged at 14 per cent. UBS Securities believes that while TCS’ revenue beat is positive, the markets are likely to favour Infosys, as the latter would enter FY23 with better business momentum.

Wipro put out the weakest results print among IT majors with sequential constant currency revenue growth of 3 per cent, against the Street’s 4 per cent expectation. While 11 large deals with a contract value of $600 million and a 2-4 per cent constant currency growth for Q4 was positive, decline in gross utilisation and rise in attrition levels to 22.7 per cent were not to the Street’s liking.

Brokerages have cut their earnings estimates and have a ‘hold’ rating, given higher valuation. While IDBI is positive on the stock given the deal pipeline, growth in order book and turnaround under the new CEO, the recent run-up in price, according to it, factors in most of the positives. The brokerage has downgraded the stock 'from ‘buy’ to ‘hold’. Given the consensus target price, Wipro has the lowest upside of 9 per cent.

While the Q3 report card was mixed, the three firms’ commentary on future prospects was upbeat. Higher tech spending across sectors is reflected in deal pipelines, which are at the highest levels for the firms. A large share of growth came from cloud services and digital transformation projects and this is expected to continue.

However, further rerating will depe¬nd on the extent of growth outperformance. Says Girish Pai, head of research at Nirmal Bang Institutional Equities Research, “While the key reason for str¬ong demand seems to be increasing te¬ch intensity induced by the pandemic, the ability of each company to capture it could determine how fast each would grow in the coming 12-24 months.”