IT cos' Q2FY25 results ahead of estimates. Infosys, LTIMindtree among 9 brokerage buys

India's technology pack delivered Q2 earnings slightly ahead of brokerages' estimates though the management guidance remained cautionary. An analysis of 30 technology companies reveals 13 delivering double-digit earnings while 2 posting in triple digits. There were six companies which reported a single-digit net profit growth along with 9 laggards who witnessed a decline.

While brokerages see pessimism bottoming out, clear trends suggesting lift in discretionary spending in the developed countries is yet to emerge, the opined. Infosys remains a top buy for many top brokerages followed by Tata Consultancy Services (TCS) and HCL Technologies. Among tier-2 and tier-3 companies, Coforge, Persistent Systems and Cyient remain preferred buys.

Q2FY25 snapshot

Tech Mahindra and Zaggle Prepaid Ocean Services posted a net profit jump in triple digits at 145% and 167%, respectively. While Zaggle's revenue growth stood at an impressive 64%, Tech Mahindra posted a 3% uptick.

Mastek, RateGain Travel Technologies, Black Box, Newgen Software Technologies, KPIT Technologies, Affle (India), Oracle Financial Services Software (OFSS), Coforge, Persistent Systems, Wipro, Latent View Analytics, eMudhra and HCL Technologies were the companies who have reported double-digit growth in profit after tax (PAT). The PAT uptick was in the range of 97% to 11%.

Six companies reported profits in single digit between 8% and 1% viz. Cyient, Infosys, L&T Technology Services, LTIMindtree, Mphasis and Tata Consultancy Services (TCS) while 9 companies reported a decline in their July-September quarter PAT between 30% and 2% on a YoY basis.

As for the revenue, 15 companies reported double-digit growth. Apart from Zaggle, top players like Coforge, KPIT Technologies, Newgen Software Technologies, Happiest Minds, Latent View Analytics and Affle reported topline growth upwards of 20%.

Meanwhile, HCL Tech, LTIMindtree, Mphasis, TCS, Infosys, Cyient and L&T Technology Services were among 11 companies which recorded a single-digit growth in revenue between 8% and 2%.

Companies which saw revenue decline in the reported quarter were Wipro, Intellect Design Arena, R Systems International and Tanla Platforms between 10% and 1%.

Brokerage View

The IT services companies under Motilal Oswal Financial Services (MOFSL) universe reported healthy performance and beat its estimates) with a median revenue growth of 2% QoQ in constant currency terms in 2QFY25 (versus 1%/0.7%/1.2% in 3QFY24/4QFY24/1QFY25).

In a note it said that the results were encouraging but the outlook remained slightly guarded, signaling persisting uncertainties. "This indicates that despite client pessimism bottoming out, a solid lift-off in discretionary spending has yet to emerge," the note said.

The domestic IT companies Q2FY25 performance was a marginally beat on Antique Stock Broking's estimates. "Post a decent 1H performance, Infosys upgraded its revenue growth guidance from 3%-4% to 3.75-4.5%, while HCL Tech narrowed its growth guidance to 3.5%-5% from 3%-5%. However, Wipro's 3Q revenue growth guidance was below our expectation at -2% to +0%," this brokerage said.

Echoing a similar view, Antique said that management commentary from most companies highlight a cautious demand environment amid geopolitical uncertainties, though the outlook could improve in the near-to-medium term with further ease in inflation.

Nuvama expects revenue growth trajectory to improve going ahead on the back of improving deal to revenue conversion while demand outlook improving on the back of bettering of macro dynamics. "For the first time after seven quarters, IT companies added net headcount," this brokerage noted.

Stock returns

The average returns by these 30 stocks since July (the onset of Q2) stood at 5.4% as on November 19 with 11 stocks giving returns in double-digits. In this, 6 have delivered single-digit returns while 13 stocks have seen their price erode by up to 33%.

The top performer has been a lesser known stock called Black Box with returns of 64% since July. Zaggle, Coforge, HCL and Persistent Systems have given returns between 26% and 47%. Tech Mahindra, Mastek, Infosys, Mphasis, Affle and OFSS have given double-digit returns below 20%.

Newgen, TCS, LTTS and Wipro are among stocks with single-digit returns.

Intellect, Happiest Minds, Sonata, Birlasoft, R Systems, Zensar, Tanla, CE Info and Tata Technologies have seen their share price decline between 33% and 8%.

Stocks to buy

1) Infosys - MOFSL/Nuvama/Investec/Nomura

2) TCS - MOFSL/Nuvama

3) HCL - MOFSL/Antique

4) LTIM - Nuvama/MOFSL

5) Coforge - Nuvama/MOFSL

6) Persistent - Nuvama/MOFSL

7) Cyient - MOFSL/ Antique

8) L&T Tech - MOFSL

9) Mphasia - Antique

(Data Inputs by Ritesh Presswala)

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