The June quarter earnings season (Q1FY24) turned out to be weaker-than-expected across growth and margins. Disappointments were sharp in a few companies such as Tech Mahindra and HCL Technologies. Stock performance too has been volatile capturing hopes of bottoming out versus reality of weak performance.
Analysts at Kotak Institutional Equities have picked
Infosys as their top bet followed by HCL Tech. "Infosys fits our thesis the best and is attractive despite recent sharp upmove. Correction in stock price provides better entry point for HCL Tech," Kotak said in a research note.
On
TCS, the brokerage said the stock price is trading close to its full valuations, which in turn is limiting an upside potential for its 'Add' rated stock.
Analysts believe that the demand environment for discretionary spending will progressively get better. At the same time, they believe that there will be sufficient large and mega deals available courtesy of large cost take-out mandates of clients.
"We prefer companies with strong capabilities, good execution, ability to address both discretionary and cost take-out mandates of clients and available at reasonable valuations," Kotak said.
Guidance—Infosys does a reality check; hope embedded in others
Infosys has slashed its revenue growth guidance to 1-3.5 percent from 4-7 percent earlier. HCL Tech has maintained its 6-8 percent guidance despite a weak quarter.
TCS and LTIMindtree, on the other hand, have dialed down expectations of double-digit growth in FY2024. "We believe that the demand environment is challenging for all companies. Guidance cut by Infosys is sharp but also reflects the reality of demand on the ground. The compound annual growth rate (CQGR) implied by Infosys guidance is just 0-1.6 percent whereas implied CAGR of 3.1-4.4 percent for HCL Tech is quite high and tough to achieve."
Kotak noted that the Street estimates capture underlying pessimism in demand for Infosys but not for others.
Large deals—new win ACV is the key metric but not disclosed
Reported Total Contract Value (TCV) was mixed, analysts say. Numbers were reasonable for companies that had large or mega deals such as Infosys, TCS, Mphasis and LTIM and weaker for others such as HCL Tech and Tech Mahindra.
Deal pipeline is reasonably strong and dominated by cost take-out deals, Kotak said. Infosys has announced a couple of deals. Cognizant announced a mega deal.
Large deals are available for mid-tier as well, with several announcements across LTIM, Mphasis and Coforge. Many such deals have large renewal component and have large tenure; ACV (average contract value) of new component is often not disclosed, the brokerage noted.
