Covid makes it harder to estimate short-term earnings, says analyst

While Indian technology outsourcing companies have largely held up better in the coronavirus pandemic than other industries in the nation, predicting how they are likely to perform in the future has never been so hard.

The uncertainty stemming from the virus and countries’ efforts to contain it have made it harder to estimate short-term earnings than at any other time in Kuldeep Koul’s 18-year career as an Indian tech-sector analyst. 

Employed by ICICI Securities, he is the top-ranked analyst covering Infosys, the nation’s second-largest IT outsourcing company, according to the Bloomberg data. He has a ‘buy’ rating on the stock with a target price of Rs 775, indicating a more than 20 per cent gain from Friday’s closing price. “Your ability to zero in on the precise numbers gets limited,” he said, but stressed that what’s more important is to try and understand what the shape of an eventual recovery will look like. Koul expects asset quality for global banks, which he says represent as much as 35 per cent of the Indian IT industry’s revenue, to be badly hit. “If I am right on that, it won’t be a V-shaped, but a U-shaped extended recovery.”

The software service providers count on clients abroad for the bulk of their business. The pandemic has clouded the outlook for their growth this year, with Wipro declining to provide forward guidance in its quarterly results for the first time last week.

The industry has still performed better than the broader market, as investors see it relatively less affected by India’s nationwide lockdown, and value the considerable cash buffers that larger IT companies, such as Tata Consultancy Services, can fall back on. 

“A lot of focus is on the ability different companies have to fulfill demand,” Koul said, adding that it will be important to watch for what proportion of employees are able to work from home, with services such as network and infrastructure more difficult to deliver remotely.
 

Balance sheets have become more important in this environment “because clients are asking for deferral in payments, so you have to be much more stringent in terms of risk management practices and do bottom up analysis of which clients might have bankruptcy issues, to decide whether you should be doing incremental work for them or not,” said Koul.

“TCS had a free cash flow to net income ratio of 100%. That’s reassuring to investors and something to look out for in results of its peers.”