Wipro, HCL Tech, TCS, Infosys, and TechM shares: Based on projections of significant deal-driven growth acceleration, the consensus 12-month forward profit growth forecast for the two IT companies stands at 11% at the moment.
Over the previous 12 months, the average expectations for the earnings per share (EPS) of the top five IT companies—Tata Consultancy Services Ltd (TCS), Infosys Ltd, HCL Technologies Ltd (HCL Tech), Wipro Ltd, and Tech Mahindra Ltd (TechM)—have decreased by 4-27 percent.
Despite this, according to JM Financial, forecasts for 12-month forward profit growth are currently between 11 and 55 percent, which is greater than previous inflection points due to strong expectations at the start of the current downgrade cycle and built-in hopes of recovery.
Furthermore, it stated that the trajectory for current earnings growth is similar to that of TCS and Wipro from 2013 to 2017 when persistently low earnings surprises resulted in an extended period of low stock return. Current earnings growth is also tracking significantly below last year’s forward projections, the report added.
“We thus maintain our stance that although the worst of earnings downgrades may have passed, there remains insufficient evidence to indicate that actual earnings might significantly surpass current estimates,” the statement read.
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Wipro
In the case of Wipro, the actual earnings growth curve appears to have shifted. According to JM Financial, this explains Wipro’s 31% return over the last year, compared to a 5% rise in Infosys shares and a 15% climb in TCS equities.
Infosys
JM Financial reported that Infosys’ consensus 12-month forward earnings growth projection is at 11%. This, it claimed, is predicated on Wall Street’s forecasts of large-deal-driven growth acceleration. Despite strong large contract wins, JM Financial expects that Infosys’ ACV growth in FY24 will be in the low single digits. “We consequently expect that Infosys’ initial FY25 projection may surprise negatively.
TCS
In the instance of TCS, JM Financial reported that the largest IT player’s earnings growth prediction is also 11%. While the brokerage does not see any downside to the estimate, a positive surprise appears unlikely, it added.
TechM, HCL Tech
According to JM Financial, HCL Tech has experienced the fewest negative earnings surprises. For TechM, earnings growth projections have climbed rapidly while actual growth has trended downward, widening the difference between the two.
TechM’s present low margins indicate that earnings should trend higher, but positive surprises are hard to come by given the company’s high ask rate. We see limited potential for positive profit surprises among the top-5 players, except Wipro and HCL Tech,” the report stated. It claimed that Infosys and Tech Mahindra appear to be most vulnerable to unfavorable surprises.
Further legs to the stock rise are improbable.
The brokerage stated that there is neither enough pessimism in current projections nor enough optimism in the environment for real earnings to meet these high expectations. These factors make the current scenario an improbable inflection point.
“Steep earnings cutbacks (due to poorer forecast) or a significant increase in discretionary spending could change that. In the absence of those, we believe the present rise is unlikely to continue,” it stated.
JM Financial stated that the Q3 earnings encouraged prospects of earnings inflection, which drove up IT stocks. Its research of the previous 15 years’ earnings trends for the top five players suggests that the ideal time to invest in IT Services equities has been in and around these inflection points.
However, not every change in earnings trend results in a high stock return. It is
It is consequently critical to understand what constitutes an inflection point. With the benefit of hindsight, we can see that stock returns are strongest when a low forward earnings growth prediction (peak pessimism) is followed by significant actual earnings growth (positive surprise). In comparison, current 12-month forward earnings growth expectations for the top five (11-55%) are still higher than historical lows. Furthermore, current real earnings growth is trailing last year’s forward earnings (a negative surprise),” it noted.
