Best Demand Environment in a Decade – Tech Mahindra

Update on the Indian Equity Market:

On Wednesday, NIFTY closed lower at 18,211 (-0.3%) dragged by MEDIA (-2.0%), METAL (-1.5%) and PRIVATEBANK (-1.4%). PSU BANK (+2.1%), IT (+1.0%) and PHARMA (+0.9%) were the gaining sectors. The top gainers in NIFTY50 were ASIANPAINT (+4.1%), UPL (+3.8%), and DIVISLAB (+2.3%). The top losers were AXISBANK (-6.5%), BAJFINANCE (-4.8%), and ONGC (-3.5%).

Edited excerpts of an interview with Mr. C P Gurnani, MD, and CEO of Tech Mahindra with CNBCTV18 on 26th Oct 2021:

  • The company is committed to the high growth trajectory over the full year of FY22, which resulted in its highest ever sequential growth in a decade. Every business segment has reported sequential growth in Q2FY22.
  • The Company has a best-in-class geographic mix with North America contributing less than 50%, Europe contributing 25%, and the Rest of the World Contributing 25%, with a geographical presence in 90 Countries. The company is well diversified in terms of geography.
  • The Company increased its guidance of around 500-600 Mn USD in Deal wins to 750 Mn to 1 Bn USD over the next few quarters, on the back of a robust deal pipeline and sustained growth in the demand environment.
  • The Company plans to improve its margins by keeping control on sub-contracting costs which are at historically high levels. Utilisation has reduced due to fresher intake in the last quarter, which the company expects to improve over time.
  • Cloud Migration and 5G are the biggest drivers of growth in new deal wins. There’s a huge movement in the legacy to digital business which is expected to continue over the next few quarters.
  • The company made two acquisitions during the quarter- Loadstone and WeMake website. Loadstone has revenue of about 35 Mn USD and is EPS accretive, the other acquisition was IP Driven and is insignificant to the topline.
  • Current levels of attrition are hurting the demand fulfillment of the company and the company plans to reduce attrition by shifting to tier-2 cities and new HR Policies.

 Asset Multiplier Comments

  • The management commentary of continued strength in end demand aided by significant deal wins, and healthy deal pipelines driven by 5G and cloud will help the company sustain its revenue growth guidance.
  • Attrition and supply-side issues are the biggest headwinds for IT Companies. The company’s bottom-line can only see sustained growth if these challenges are dealt with in the upcoming quarters.

Consensus Estimate (Source: market screener website)

  • The closing price of Tech Mahindra was ₹ 1,568/- as of 26-October-21. It traded at 25x/22x/19x the consensus EPS estimate of ₹ 64/73/81 for FY22E/ FY23E/FY24E respectively.
  • The consensus target price of ₹ 1,703/- implies a PE multiple of 21x on FY24E EPS of ₹ 81/-.

 

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

Confident of maintaining 15- 20% growth in VNB – HDFC Life

Update on the Indian Equity Market:

On Tuesday, NIFTY ended higher at 18,268 (+0.8%) as it closed near the intraday high level of 18,310. Among the sectoral indices, REALTY (+3.6%), METAL (+2.7%), and MEDIA (+2.6%) ended higher, whereas PRIVATE BANK (-0.2%) was the only sector that ended lower. Among the stocks, TATAMOTORS (+6.0%), TATASTEEL (+4.2%), and SBILIFE (+3.8%) led the gainers while INDUSINDBK (-1.9%), ICICIBANK (-1.2%), and POWERGRID (-0.8%) led the losers.

Excerpts of an interview with Ms. Vibha Padalkar, MD and CEO, of HDFC Life Insurance (HDFCLIFE) with CNBC TV18 on 25th October 2021:

  • The company is bullish on prospects of the life insurance industry, assuming no covid 3rd wave takes place. As people get comfortable with the status quo, the company expects the demand for life insurance to come back.
  • The company has grown at a rate of 20%, which is faster than the industry growth rate and it is confident that it will continue to grow at this rate. VNB (Value of New Business) growth between 15-20% is possible.
  • From the product mix, Unit linked, participating, non-participating, annuity, and protection contribute around 26%, 30%, 32%,5%, and 7% of the APE (Annualised Premium Equivalent) respectively.
  • The company has paid out 2,456 claims worth Rs 5,560mn in 1HFY22, and it maintains an additional  Rs 2,000+ mn of provisions in case it needs to pay out any additional claims.
  • The company expects a 10-15% price hike in reinsurance products and it is in negotiation with its reinsurance providing partner over the price hikes. This will be done by the end of 3QFY22.
  • Individual term insurance doesn’t disproportionately contribute to the VNB of the company. The reinsurers charge HDFC life for the product over the lifetime of the policy, whereas the customers pay premium under the limited pay for 5-6 years altogether. As the period between these 2 differs, the company hasn’t yet figured out the cost it will pass on to its customers.
  • The company’s cash will go down by 12 to 14% after the acquisition and merger of Exide Life. HDFC life’s solvency may go down to 175-180% from the current 190-195%, but the profits from the next two quarters may get added on to the solvency and help bridge the gap.

 

Asset Multiplier Comments

  • As Exide Life’s agency channel will add 40% to the company’s current agency channel, the company will benefit from the effect of operating leverage. This will help improve the company’s margins.
  • The company has posted 20.8% YoY growth in APE and 23.6% YoY growth in VNB (Value of new business) numbers in 2QFY22. Given its better than industry growth rate, and the management’s confidence in maintaining it in the future, this might have a positive impact on the company’s fundamentals.
  • Increase in reinsurance costs will likely drive term insurance rates higher in the next few quarters. This may have impact on its future profitability.

Consensus Estimate: (Source: market screener website)

  • The closing price of HDFCLIFE was ₹ 690/- as of 26-Oct-2021.  It traded at 100x/ 76x/ 64x the consensus earnings estimate of ₹ 6/ 9/ 11/- for FY22E/FY23E/FY24E respectively.
  • The consensus target price of ₹ 787/- implies a PE multiple of 74x on FY24E EPS of ₹ 10.7/-.
  • In the case of life insurance companies, the embedded value per share is the correct multiple for valuing the company. The consensus estimate of this metric is not available on any of the websites.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

Both urban and rural markets have shown strong recovery – Asian Paints

Update on the Indian Equity Market:

On Monday, NIFTY closed at 18,125 (+0.1%). Private bank (+2.2%), Bank (+2.2%), and Financial Services (+1.3%) were the sectorial gainers, while Realty (-2.8%), Auto (-1.8%), and Consumer Durables (-1.4%) were the losers. The top gainers in NIFTY50 were ICICI Bank (+11.5%), AXIS Bank (+3.5%), and ONGC (+2.7%). The top losers were BPCL (-3.3%), Bajaj Finserv (-3.3%), and SBI Life (-2.9%).

Excerpts of an interview with Mr. Amit Syngle, MD, and CEO of Asian Paints with ET Now on 22nd Oct 2021:

  • In 2QFY22, both value and volume growth has been very strong. Unlike FY21, Metro T1 and T2 cities have performed well this year. The demand sentiment in the bigger cities have been pretty good because they are growing rapidly compared to T3 and T4 cities.
  • The difference between value and volume growth is not much, and overall, both are healthy because of leeway with respect to the premium in the luxury products.
  • Real estate and construction have been picking up and that has contributed to the overall growth. Institutional markets also looking strong, though it cannot be attributed to pent up demand. During the quarter they have seen very healthy volume growth.
  • They feel that new demand has come in at this point of time. In Q1FY22, May was affected very badly but in June the growth was good.
  • Overall, the sentiments have been much better. The markets have been great and monsoons have provided very strong sentiments which may have contributed to a very strong volume growth.
  • Asian Paints has a strong presence in both rural and urban markets. They are expanding their business in rural markets aggressively in the last two years. The monsoon has been good and it is strongly reflecting on the whole agriculture income.
  • The trend shows in H1 was that while T1 and T2 cities have done well. The T3 and T4 cities have performed relatively lower but the overall growth has been quite satisfactory.
  • Increase in the prices of raw material is not only in India, it is happening across the world. Asian Paints took some pre-emptive actions in terms of taking price increase but they did not want to destabilise the markets.
  • In 2QFY22 the inflationary trends continued and they expect this inflationary trend continue well into Q3FY22 as well. This is really unprecedented in terms of what they have seen in last 40 years, they are taking one series of price increase to address margins issues.
  • They are looking at formulation efficiencies in a big way. They have done lots of work in last six months, bringing innovation in technology both in terms of formulation as well as manufacturing and that has given very good results.
  • They have taken an overall price increase of about 7.5% over the last six months. Going forward, the pace of price hikes would be a little bit higher.
  • Price increase is not the only strategy, the company will look at a lot of other areas so that they are able to improve the overall margin trajectory.
  • The price elasticity is more towards the economy set of products not towards the premium or luxury products. Overall price elasticity exists as far as demand in concern. They definitely see what they are going to balance is in terms of saying how do they take price hikes so that market sentiments not affected.

Asset Multiplier Comments

  • The paints sector is likely to deliver strong topline growth as the organized players have started gaining market share from the unorganized ones. This growth will be aided by opportunities in the rural market which offers good prospects after a good monsoon season.
  • In 2QFY22, Asian Paints missed street estimates on the bottom line due to a rise in raw material prices. Steep inflation in raw material prices impacted the operating margins. The Company is confident of turning around the situation in the coming quarter due to festive demand.

Consensus Estimate (Source: market screener websites)

  • The closing price of Asian Paints was ₹ 2,923/- as of 25-October-21. It traded at 89x/65x/53x the consensus EPS estimate of ₹ 32.8/45/54.6 for FY22E/ FY23E/FY24E respectively.
  • The consensus target price of ₹ 3,076/- implies a PE multiple of 56x on FY24E EPS of ₹ 54.6/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

Luck Vs. Skill in Investing

Jeremy Chia reminds us that investing is a game of probabilities. In any game where probability is a factor, luck undoubtedly plays a role. This leads to the age-old question of how much of our investment performance is impacted by luck?

Is an investor who has outperformed the market a good investor? Similarly, is an investor who has underperformed the market a lousy investor? The answer is surprisingly complex.

Long term stock prices tend to gravitate toward the present value of the company’s expected future cash flow. However, that future cash flow is influenced by so many factors that result in a range of different possible cash flow possibilities. Not to mention that on rare occasions, the market may grossly misprice certain securities. As such, luck invariably plays a role.

Skill is one aspect of investing that is hard to quantify. However, there are a few things Chia looks at. First, we need to analyse a sufficiently long track record. If an investor can outperform his peers for decades rather than just a few years, then the odds of skill playing a factor become significantly higher. Although Warren Buffett may have been lucky in certain investments, no one can deny that his long-term track record is due to being a skilful investor.

Next, focus on the process. Analysing an investment manager’s process is a better way to judge the strategy. One way to see if the manager’s investing insights were correct is to compare his original investment thesis with the eventual outcome of the company. If they matched up, then, the manager may be highly skilled in predicting possibilities and outcomes.

Third, find a larger data set. If your investment strategy is based largely on investing in just a few names, it is difficult to distinguish luck and skill simply because you have only invested in such a few stocks. The sample is too small. But if you build a diversified portfolio and were right on a wide range of different investments, then skill was more likely involved.

Mauboussin wrote: “One of the main reasons we are poor at untangling skill and luck is that we have a natural tendency to assume that success and failure are caused by skill on the one hand and a lack of skill on the other. But in activities where luck plays a role, such thinking is deeply misguided and leads to faulty conclusions.”

Chia concludes that it is important that we understand some of these psychological biases and gravitate toward concrete processes that help us differentiate between luck and skill. That’s the key to understanding our own skills and limitations and forming the right conclusions about our investing ability.

This Week in a nutshell (18th Oct to 22nd Oct)

Technical talks

NIFTY opened the week on 18th October at 18,500 and closed on 22nd October at 18,114 during the week, the index lost -2%. Nifty is trading at an RSI of 72, with support at 18,095 and resistance at 18,602.

Weekly highlights

  • China Evergrande Group pulled back from the edge of default by paying a bond coupon of $83.5 million before Saturday’s deadline. This came as a surprise as Evergrande was expected to make payments to local creditors and suppliers first who are waiting for the company to make due payments.
  • Applications for unemployment benefits in the US have dropped by 6,000 to 2,90,000 this week. Layoff levels have become normal but hiring by companies has been slow. It is observed that people who were laid off have stopped looking for new jobs.
  • India is going through a coal crisis which has coincided with an increase in demand for electricity. The Centre is planning to maintain sufficient reserves of coal and natural gas to tackle future shortage of coal.
  • India’s top private banks including HDFC Bank, Kotak Mahindra Bank, Axis Bank and IndusInd Bank are bidding for Citi’s consumer banking business after it announced exit from consumer banking in 13 countries including India.
  • Maharashtra is witnessing a declining trend in its covid cases and hence the Government eased restrictions starting 22nd October by reopening amusement parks and cinemas. Restaurants and shops are also allowed relaxed timings. This will have a positive impact on the restaurant and entertainment industry.
  • Federal Reserve Chair Jerome Powell indicated that the central bank would begin winding down its bond purchases but remain patient on raising interest rates.
  • US markets continued their rally this week but fell on Friday as the Fed warned about concerns about inflation.
  • The foreign institutional investors (FII )sold equities worth of Rs 73,530 mn, while domestic institutional investors (DIIs) sold equities worth of Rs 45,040 mn.

Things to watch out for next week:

  • Result season continues next week in the US, and India. Big IT companies such as Facebook, Microsoft, Alphabet are set to announce earnings next week. In India, banks like Kotak bank and IndusInd bank are set to report earnings. commentary from banks regarding loan book growth will be critical.
  • Pharma biggies such as Cipla, Lupin and Torrent will also report earnings next week.
  • Commentary regarding raw material inflation and logistical challenges would be critical.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

Increased revenue guidance due to robust demand environment – Larsen & Toubro Technology services

Update on the Indian Equity Market: 

On Thursday, NIFTY closed lower at 18,178 (-0.5%) led by IT (-2.5%), CONSUMER DURABLES (-1.8%), and METAL (-1.8%). PSU BANK (+2.7%), BANK (+1.3%), and FINANCIAL SERVICES (+1.2%)  were the gaining sectors. Top gainers in NIFTY50 were KOTAKBANK(+6.9%), TATAMOTORS (+4.5%), and GRASIM (+3.5%). The top losers were ASIAN PAINTS (-4.9%), HINDALCO (-3.8%), and INFOSYS(-2.5%). 

Edited excerpts of an interview with Amit Chadha, MD, and CEO of L&T Tech Services  with CNBCTV18 on 20th October 2021: 

  • The company has increased its FY22 revenue guidance for the second consecutive quarter to 19-20 percent from the previous 15-17 percent owing to the strong demand and robust supply chain. 
  • Earlier the company had anticipated a USD 1 bn runrate between Q2FY23E and Q3FY23E, which could be met sooner than expected. 
  • The company took on board about 1,200 freshers in the last six months and plans to hire about 2,000 in 3QFY22E and 4QFY22E. 
  • On the margin front, the company has delivered EBITDA margins in the 18% range despite the wage hikes and the overhead costs in FY21, going forward the company expects them to stay in the 18 percent range. 
  • With the robust market environment and the company’s order pipeline improvement to about 18% over 1QFY22, the company’s overall aim is to reach a USD 1.5 billion run rate by FY25.
  • The company expects the demand for CY22 and CY23 to remain at the current level.
  • The average deal size in the engineering business is between USD 10 million and USD 25 million. The firm has landed a number of transactions ranging from USD 10 to USD 25 million. They are also looking for agreements worth more than USD 50 million.
  • The offshoring revenue has increased by 100 bps. The company expects the offshoring revenue percentages to stabilize and improve further on account of the optimistic demand environment from its clients in the United States and Europe, in CY22.
  • On the acquisition front, the company is looking for a US or European-based company in the ISV segment or transportation segment, or in the medical technologies segment. The company is currently assessing different companies for the purpose and is in various stages of conversation with different companies.  The company has an appetite for acquiring a company with a revenue of 50 million dollars as well, given the company’s strong balance sheet and cash flow.

 Asset Multiplier Comments 

  • The management commentary of continued strength in end demand aided by significant deal wins, and healthy deal pipelines suggest growth could significantly exceed the upper end of the revised guidance.
  • The aggressive recruiting and re-skilling initiatives, will assist the business to overcome supply-side limitations.

Consensus Estimate (Source: market screener websites) 

  • The closing price of Larsen & Toubro Technology services was ₹ 4726/- as of 21-Oct-21. It traded at 54x/46x/39x the consensus EPS estimate of ₹ 88/102/121 for FY22E/ FY23E/FY24E respectively. 
  • The consensus target price of ₹ 3,965/- implies a PE multiple of 32x on FY24E EPS of ₹ 125/-. 

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.” 

 

Cyber Security and ESG emerging as new pockets of growth – Larsen & Toubro Infotech

Update on the Indian Equity Market:

On Wednesday, NIFTY closed lower at 18,266 (-0.83%) led by CONSUMER DURABLES (-2.91%), REALTY (-2.16%) and METAL (-2.06%). PSU BANK (+1.54%) and MEDIA (+1.03%) were the only gaining sectors.

Top gainers in NIFTY50 were BHARTIARTL (+3.96%), SBIN (+2.66%) and TATAMOTORS (+1.62%). The top losers were HINDALCO (-3.94%), BPCL (-2.66%), and TITAN (-2.61%).

Edited excerpts of an interview with Mr. Sanjay Jalona, Chief Executive Officer and Managing Director, Larsen & Toubro Infotech with CNBCTV18 on 19th Oct 2021:

  • The company is seeing three key drivers of revenue growth
    • Restructuring: Every industry is reimagining its processes to deal with the new normal. All industrial manufacturing companies, which typically have been business-to-business (B2B) companies, are spending to transform from B2B to business-to-consumer (B2C) and that creates a lot of opportunities for the company in the tech world.
    • Cyber Security and environmental, social, and governance (ESG) are emerging as new pockets of growth. Work from home culture requires information security which is a big area of growth. ESG is another area having potential as every company has a goal on carbon neutrality and sustainability. So, ESG creates a lot of data opportunities for the industry, unlike in the past.
    • Great Resignation: Companies are currently seeing a double-digit attrition rate which they are not used to.
  • There has been a change in the way, format, and size of the deals. There are a lot of deals for the transformation journeys of the customers.
  • Large deals typically are consolidation deals that have taken a back seat in their (customers) priorities as customers are focusing on their digital transformation journey. The bulk of investment, time, and efforts are going into the digital transformation journey.
  • Overall, the deal pipeline will be stronger for the company. The large deal pipeline will continue to be strong for at least the next two to three years.
  • Even after giving 2 consecutive wage hikes, the attrition rate for 3QFY22 stands at ~19.6% (up 470 bps QoQ). The reason for such a high attrition rate is that the talent market is very hot currently as every company is hiring tech talent. The overall demand is high and will continue to be high for the next 2-3 years. The need for automating is creating a further gap in the skill set that is required.
  • To cope up with the high attrition rate:
    • The company have increased the freshers hiring target to 5,500 v/s 4,500 for FY22E,
    • Plans to hire additional 1000 employees on Hired Trained Deployed (HTD) basis,
    • It is also ramping up the skilling and upskilling program for the company’s talent, and
    • Evaluating ways to hire non-tech (non-engineers) bright talents across India who desire to enter the computer field to create a talent pool.
  •  The company has given guidance to cross Rs 2 bn in revenues.

 Asset Multiplier Comments

  • The company has been performing consistently well with robust and broad-based growth – across verticals, geographies, and service lines.
  • We believe that the large deal wins, strong large deal pipeline, and aggressive hiring/re-skilling plans, which would help overcome the supply-side constraints will help the company to drive profitable and sustainable growth in the medium term.

Consensus Estimate (Source: market screener websites)

  • The closing price of Larsen & Toubro Infotech was ₹ 6,960/- as of 20-Oct-21. It traded at 52x/44x/38x the consensus EPS estimate of ₹ 131/156/179 for FY22E/ FY23E/FY24E respectively.
  • The consensus target price of ₹ 6,090/- implies a PE multiple of 34x on FY24E EPS of ₹ 179/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

 

Organic growth to sustain as guided, no big bang acquisitions planned– HCLTECH

Update on the Indian Equity Market:

On Tuesday, NIFTY50 ended its 7-day winning streak to close at 18,419 (-0.3%), dragged down by REALTY (-4.7%), PSUBANK (-3.7%), and FMCG (-3.2%). The sectoral gainers were IT (2.2%), and FINANCIAL SERVICES (0.2%). Among the stocks, TECHM (+4.3%), LT (+3.3%), and INFY (+1.8%) led the gainers while ITC (-6.3%), TATAMOTORS (-4.9%), and EICHERMOT (-4.5%) were the top laggards.

HCLTECH missed the street estimates in the declared earnings for the quarter ended 30th September 2021. Mr. C Vijayakumar, Chief Executive Officer, and Mr. Prateek Aggarwal, Chief Financial Officer at HCL Technologies discussed the quarter gone by and reaffirmed its annual FY22 guidance in an interview with CNBC-TV18 on 18th October 2021:

  • The Products and Platforms business has been a laggard in FY22, with quarterly slippages affecting the guidance of the segment but the impact is immaterial to the top-line growth, where the company has reaffirmed its EBIT margin guidance of 19-21%.
  • Q2FY22 was the best quarter for the company with unprecedented growth in client mining, large deal wins, and total headcount. The company has introduced a formal dividend pay-out policy on the back of its commitment to rationalise capital allocation.
  • The Company has rolled out the first tranche of wage hikes in Q2FY22 and expects the second tranche to be rolled out in Q3FY22. It expects the slippages in the Products and Platforms business to be recovered in the upcoming quarter.
  • The company had a track record of a high dividend pay-out until FY20. With a significant outflow due to an acquisition, the pay-outs were subdued over the past few quarters. With a recovery in free cash flows and demand from investors, the company has decided to come up with a formal dividend policy with higher pay-outs.
  • The current demand environment has established momentum in the organic business. The company plans to focus on executing current demands rather than go all-in after a major acquisition. The company may add small tuck-ins to expand capabilities or geographies.
  • In Q2Fy22, the company had a strong deal win rate. The pipeline in Q1FY22 was at the highest level ever, it slightly moderated because the company closed a lot of deals.
  • The pipeline has a good mix of mid-size and large deals. There is also a lot of momentum in existing accounts, where customers are ramping up on several digital initiatives, with smaller ticket transformational projects are being taken up by the company.
  • The company expects to exceed its initial guidance on hiring 20,000-22,000 freshers on the back of robust demand and backfilling attrition in the recent quarters.
  • Momentum is seen across all verticals with BFSI and Manufacturing being the leaders. The manufacturing vertical is seeing an uptick in engineering services with various transformational deals and projects being undertaken.

 

Asset Multiplier Comments

  • COVID-19 pandemic has unmistakably created a paradigm shift in the ITES Industry, with a strong focus on digitisation around the world across both size and verticals will result in a high growth period for the industry.
  • HCL Tech like its peers will also continue to face supply-side crunch and attrition problems. The situation is expected to improve over the next few quarters which will help to reduce the margin pressures.

Consensus Estimate: (Source: market screener website)

  • The closing price of HCLTECH was ₹ 1,232/- as of 19-October-2021. It traded at 25x/ 22x/20x the consensus earnings estimate of ₹ 49/ 56/ 63. for FY22E/FY23E/FY24E respectively.
  • The consensus target price of ₹ 1360/- implies a PE multiple of 22x on FY24E EPS of ₹ 63/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

Expect 30% YoY constant currency revenue growth in 3QFY22 – WIPRO

Update on the Indian Equity Market:

On Monday, NIFTY50 rose for the seventh consecutive session to close at 18,477 (+0.8%), led by PSU BANK (+4.0%), METAL (+3.9%), and IT (+1.6%). The sectoral losers were PHARMA (-0.9%), and MEDIA (-0.7%). Among the stocks, HINDALCO (+5.2%), INFY (+4.8%), and TECHM (+3.7%) led the gainers while M&M (-2.2%), HCLTECH (-2.1%), and DRREDDY (-1.8%) led the laggards.

Wipro recently declared earnings for the quarter ended 30th September 2021, which beat street estimates. Mr. Thierry Delaporte, CEO, Wipro discussed the quarter gone by and his plans for the upcoming quarters with The Economic Times on 18th October 2021:

  • Mr. Delaporte took charge as the CEO of the company during the Covid pandemic. During that time, the company moved into execution mode and it has been fast at defining the people who are going to drive the organisation forward.
  • During the last year, the company has taken bold steps and changed about 30% of the top 200 leaders. It has been an unprecedented change and a lot of talent has also been brought in from outside. Wipro made its biggest acquisition, Capco which is delivering great results.
  • The CEO’s responsibility was to ensure the company remains driven by a sense of purpose and pays attention to the world around it.
  • What needed to change was assertiveness about strategy, running operations, making decisions, and sticking to it. The second thing he wanted to change was raising the bar in terms of ambition, and the third is a ruthless focus on accountability and outcome.
  • Wipro will deliver ~30% year-on-year constant currency revenue growth in 3QFY22E. He expects the growth to continue in FY23E as well, as the company is firing on all cylinders. Wipro will continue to do more acquisitions and possibly a big one.
  • The best performing company in the IT industry is the one with the best talent in terms of quality – people who understand the business and how technology can be leveraged to transform. These are the people Wipro is hiring. The talent is also in terms of quantity because of the increased demand and higher attrition levels.
  • Wipro plans to integrate a lot more freshers. In FY22E, Wipro plans to hire about 16,000-17,000 and 25,000-30,000 in FY23E.
  • He expects higher attrition to continue for the next 3-4 quarters. In 2QFY22, Wipro’s attrition was 20.5% and he expects it to worsen. There’s always seasonality, in the last quarter of the year and people tend to stick around, according to Mr. Delaporte.
  • Wipro would be investing more in 5G and artificial intelligence than in quantum computing right now. He is betting big on engineering services.

 Asset Multiplier Comments

  • The IT sector has been a beneficiary of the increased investment in technologies due to shifting to work from anywhere post the pandemic. While revenue growth is expected for the quarters to come, the sector was also a beneficiary of lower operating costs.
  • As people return to the office for work, some of these costs are expected to come back. The increased pace of vaccinations around the world will likely increase people traveling for work. The talent war has already led to companies rolling out 2-3 wage hikes in a year. With the costs increasing, Wipro like all other IT companies may face margin pressures in the near term.

Consensus Estimate: (Source: market screener website)

  • The closing price of WIPRO was ₹ 711/- as of 18-October-2021. It traded at 32x/ 28x/ 25x the consensus earnings estimate of ₹ 22/ 25/ 28 for FY22E/FY23E/FY24E respectively.
  • The consensus target price of ₹ 676/- implies a PE multiple of 24x on FY24E EPS of ₹ 28/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

This Week in a nutshell (Oct 11th to Oct 14th)

This Week in a nutshell (Oct 11th to Oct 14th)

Technical talks

NIFTY opened the week on 11th Oct at 17,895 and closed on 14th Oct at 18,339. During the week, NIFTY gained 2.5 percent and saw a bullish candle formation on the weekly scale. At the current juncture, support for Nifty is placed at 17,881 and 17,685 zone, while resistance can be seen around 18,365 levels.

On the sectoral front, Nifty PSU Bank, Auto and Metal index were the top gainers while Nifty IT was the only loser this week.

Weekly highlights

  • The week started with TCS quarterly numbers. The IT sector was in red as the numbers fell short of analysts’ expectations.
  • An investment worth Rs 75,000 mn by TPG Rise Climate and Abu Dhabi’s ADQ in Tata Motors newly formed subsidiary for the EV business uplifted the market sentiments.
  • On Wednesday:
    • Government released retail inflation data. It declined to 4.35 percent in September, mainly due to lower food prices. Consumer Food Price Inflation (CFPI) for September stood at 0.68 percent in September, compared with 3.11 percent in August.
    • Industrial production grew 11.9 percent in August mainly due to a low-base effect and good performance by manufacturing, mining and power sectors that surpassed the pre-COVID level.
    • IMF retained India’s growth outlook for both the current and the next fiscal. It pegs India’s real GDP growth at 9.5 percent for FY22, 8.5 percent for FY23, and 6.1 percent by FY27.
  • Government removed restrictions on domestic flight capacity and will now be allowed to operate at full capacity from October 18. The decision to ease the norms was taken after reviewing the current air travel demand.
  • RBI kept repo and reverse repo rates unchanged at 4 per cent and 3.35 per cent, respectively. The central bank also retained the GDP growth forecast at 9.5 per cent for the FY22.
  • The RBI Governor said that with the worst of the second wave behind us and substantial pick-up in COVID-19 vaccination giving greater confidence to open up and normalise economic activity, the recovery of the Indian economy is gaining traction. He also cautioned about the elevated global crude oil, other commodity prices, combined with acute shortage of key industrial components and high logistics costs, are adding to input cost pressures.
  • Buying was seen in auto, metal, energy and banking sectors. Strong business preview numbers and favourable credit growth data ahead of 2QFY22 numbers boosted the morale further.
  • US market started the week in red due to worries about surging energy prices, jammed-up supply chains and companies failing to pass on higher costs to consumers. However, better than expected quarterly earnings reports from Wall Street banks and iPhone chipmaker Taiwan Semiconductor Manufacturing Company lifted the mood.
  • The foreign institutional investors (FII) bought equities worth of Rs 10,380 mn, while domestic institutional investors (DIIs) sold equities worth of Rs 32,950 mn.

Things to watch out for next week

  • The quarterly earnings season will gain momentum next week as the domestic market awaits September quarter results. With the expectation of a strong recovery in corporate earnings, banking will be the key sector under focus in the coming days.
  • The US will announce its crude oil inventories, which is likely to impact the global crude supplies and India’s import bill.
  • Also, the initial jobless claims, US goods and services manufacturing purchasing managers’ index (PMI) would be on the radar of market participants, guiding the future course of action.

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