Analysis: TechMahindra ahead of Infy, Wipro in growth, margin deviations

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Published: March 5, 2020 12:30 AM

Two metrics in particular are key: (1) q-o-q growth (US dollar or constant currency) and (2) Ebit margin.

top-tier IT companies, TCS, Wipro, IT services sector, Tech Mahindra, HCL Tech, InfosysTCS & Wipro have had the least adverse reaction to large misses while it has been more for Infosys & HCL Tech.

In this report, we analyse trends in quarterly consensus estimates & actual performance for top-tier IT cos over last five years. On aggregate, q-o-q growth has been within a +/-50bps range on 50% of occasions and margins 60% of time. TechM has had most instances of large deviations on both growth & margins; Infosys & Wipro rank next, respectively. TCS & Wipro have had the least adverse reaction to large misses while it has been more for Infosys & HCL Tech. In IT services sector, where regular data points are relatively fewer, quarterly results act as a key tracker of sector & company performance. At the beginning of each quarter, analysts routinely churn out quarterly estimates for the previous quarter and there is a lot of focus on performance against these consensus estimates.

Two metrics in particular are key: (1) q-o-q growth (US dollar or constant currency) and (2) Ebit margin. In this note, we analyse trends in consensus quarterly estimates and actual performance over the last five years for the top-tier Indian IT cos. On aggregate, consensus estimates have been within +/-50bps of q-o-q US dollar growth 50% of the time while on Ebit margin it has been within a similar range 60% of the time. Large deviations of over 100bps are more common in q-o-q growth having occurred 25% of the time and relatively less in margin at only 10% of the time. In fact over the last five years, on aggregate large beats vs. consensus estimate on q-o-q growth (17% of occasions) have been more common than large misses (7%).

Infosys and Tech Mahindra, in particular, have delivered large positive surprises on growth on 26% & 32% of occasions, respectively; for Tech Mahindra, there seems to have been a bias towards under-estimation of growth with beat of >50bps in q-o-q growth more than 50% of the time in last 5 years. Large margin deviations of >50bps have been most common for Tech Mahindra followed by Wipro. For TCS, large deviations in either growth or margin relative to estimate have been relatively rare though we note a slight bias towards over-estimation of growth by analysts.

We find weak correlation between dispersion of analyst estimates and large beats & misses on both growth & margins, suggesting this is not an indicator of positive & negative surprises. Our analysis of stock price reaction to large beats & misses suggests relatively mild reaction to large misses for both TCS & Wipro and more adverse reaction for Infosys & HCL Tech over this period. In case of large beats, Tech Mahindra has seen the most positive stock price reactions on a consistent basis. We note though that stock price reactions would incorporate other factors such as deal TCV, guidance, commentary and any other major updates.

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