Following a positive start to the earnings season with TCS results last week, the follow through, so far, has been good with both Infosys and Wipro reporting better-than-expected results.

Revenue growth

Infosys reported revenue of ₹25,927 crore and EPS of ₹12.25 that were 2-3 per cent above consensus expectations (S&P Capital IQ). On the back of good underlying momentum for its services, the company also increased FY21 revenue outlook to a YoY (year-on-year) constant currency (cc) growth of 4.5-5 per cent against 2-3 per cent given at the time of last quarter results. The company also increased operating margin guidance for FY21 to 24-24.5 per cent vs 23-24 per cent earlier.

Infosys continues to outperform peers. Its constant currency growth for the December quarter at 5.3 per cent QoQ (quarter –on-quarter) and 6.6 per cent YoY was better than the growth reported by TCS at 4.1 per cent QoQ and 0.4 per cent YoY. Digital momentum continues unabated with the segment now representing 50 per cent of sales in the three months ended December 20 vs 40 per cent in the same period last year.

The company saw growth across all verticals except manufacturing (9 per cent of revenue) on a YoY basis. BFSI, which is the largest vertical and represents a little over 30 per cent of revenues, saw good YoY growth at 12 per cent. Compared to TCS which saw YoY constant currency growth in 3 out of its 7 verticals, Infosys reported YoY growth in 7 out of its 8 verticals. The company also saw growth across geographies. Deal momentum remains solid with total contract value of large deals at an all-time high of $7.13 billion in the December quarter vs $3.15 billion in September quarter.

Strong earnings

Wipro reported strong earnings with EPS 16 per cent above consensus estimates (S&P Capital IQ). Revenue was 1 per cent above consensus, driven by better-than-expected IT services revenue (key segment). The strong earnings were driven by good improvement in operating margin which is now at a 22-quarter high. Wipro, over the last few quarters, has been showing steady improvement in optimising its operations and improving margins vs historical levels.

While results will be viewed positively, compared to Infosys and TCS, Wipro still lags in revenue growth with its December quarter constant currency revenue growth at 3.4 per cent QoQ and down 2 per cent YoY. While company reported sequential growth across verticals, on a YoY basis it saw growth in 2 out of 7 verticals.

Broadly the results from the big three in IT services confirm a structural trend in demand for digital and cloud services outpacing the decline in legacy services that will likely keep revenue momentum going over the next few years. However, given that shares of these companies have been rallying over the last year, it needs to be seen if the companies can deliver anything more that can justify current valuations.

Infosys is up around 80 per cent in the last one year and now trades at approximately 27 times FY22 EPS when its EPS CAGR for FY21-23 is likely to be around 12 per cent (S&P Capital IQ consensus expectations). It is trading cheaper than TCS though. This has been the case historically although the discount vs TCS has reduced in recent years due to its better performance.

Wipro is also up around 80 per cent in the last one year and now trades at about 25 times FY22 EPS when its EPS CAGR for FY 21-23 is likely to be around 9 per cent.

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