Don’t miss the latest developments in business and finance.

Testing times

At such high valuations of IT stocks, there is no room for missing expectations

Image
Niraj BhattAmriteshwar Mathur Mumbai
Last Updated : Feb 06 2013 | 6:11 AM IST
After a terrific performance in the stock prices of IT companies in the third quarter, it is time that results match up with expectations. The BSE IT index has gained 19.76 per cent in the third quarter, while the Sensex gains have been less than half at 8.84 per cent.
 
Among the major sectoral indices of the BSE, the IT index has been the best performing index. For the first half of FY06, the IT index was an underperformer by around 50 per cent compared to the Sensex.
 
One reason for the improvement in sentiment has been the 2.34 per cent depreciation in the rupee against the dollar, which will help in higher margins.
 
But the top companies are hedged to the extent of 40-50 per cent on their dollar exposure, which is expected to have been at around Rs 44, about the level in September 2005. Beyond this development, the third quarter was rather uneventful for tech companies.
 
Generally, the third quarter is sluggish because of lesser working days owing to the holiday season in the US and Europe, but this time some analysts are predicting that tech companies will not be affected by seasonality.
 
Analysts expect the stronger dollar to impact the bottomline by about 0.75-1 per cent. The sequential growth in revenues and net profit for tech companies is estimated between 8 per cent and 11 per cent in the December 2005 quarter compared with the guidance of around 5.5-7.5 per cent.
 
For the top two players-TCS (trailing twelve-month P/E of 37) and Infosys (P/E of 45)-market expectations are been high and even a small shortfall could end up disappointing investors.
 
Wipro, at a trailing P/E of 42, is likely to be adversely affected owing to its wage hike in the December quarter. The Satyam stock, with a trailing P/E of 35, has done better than the other three tech companies in December quarter as there has been an improvement in its business performance.
 
Operating margins of IT companies are also expected to improve by over 1 per cent. Valuations are not cheap, any shortfall in expectations may see some correction despite a buoyant outlook for FY07.
 
Engineering sector: bullish outlook
 
Large players in the engineering sector are expected to report a strong improvement in operating profit and margins in the December quarter.
 
The key factors that are expected to help drive profit in the last quarter are buoyant order inflows for engineering companies, thanks to a continued upturn in the domestic and global capex cycle.
 
Also, there has been an easing in key input costs such as steel and, in addition, CEOs of engineering companies have repeatedly stressed at analyst conferences, that recent contracts with customers include passing on variations in steel prices to end-users.
 
Large players in this sector such as BHEL had already seen their outstanding order book grow by 11.8 per cent y-o-y to Rs 32,200 crore in the September 2005 quarter, while Larsen & Toubro's engineering and construction division saw its order backlog expand 17.2 per cent y-o-y to Rs 19,721 crore.
 
An improved operating environment in the December 2005 quarter, too, is expected to help BHEL grow its profits by 40-45 per cent y-o-y and in the case of ABB, a growth of 48-50 per cent is projected, point out analysts at domestic brokerage houses. L&T, too, is expected to grow its profits by 35 per cent y-o-y in the last quarter.
 
The expectations of a strong performance by the engineering sector are already factored in by Dalal Street. The BSE Capital Goods index is up 18.17 per cent in the third quarter, making it the second best among major sectoral indices.
 
While major engineering companies are trading at a trailing twelve-month P/E between 30 and 45, Larsen & Toubro trades at 22.

 
 

Also Read

First Published: Jan 06 2006 | 12:00 AM IST

Next Story