What is your first reaction to the numbers in terms of CC growth? Is it better than estimated or in line with a marginal miss?
Overall performance was decent. Revenue growth was a bit of a positive surprise but there are two-three important parameters where we see that there is a disappointment. Of course, margins we estimated to be close to 25% – 24.9% EBIT margin – but it came at just 24.5%, which is below our as well as Street estimate, despite attrition being stable and most importantly overall employee addition being negative this quarter.
So the number of employees have reduced despite that, employee costs have gone up. Geography-wise also, Europe, Asia Pacific, Middle East – all are now growing in a single digit. That is also a concern and in addition to all these BFSI sectors are also reporting very low growth. These were the key drivers for the company over past several quarters but now turning slightly negative.
Given that the order win is below $8 billion, we are not very positive on that side also. We believe that it should have been slightly better. So the situation is decent enough but it will not support the valuation of this company at this level.
What does valuation mean in terms of the IT sector as a whole? Does each company has to be taken case by case?
We need to check each company case by case, based on the geography-wise exposure, currency exposure as well as vertical-wise exposure. But in the case of
, it is already trading at 25X and after this result, we would not see any upgrade in the earnings. Also at this juncture of high level of uncertainty, valuation at 25X seems to be slightly expensive if we consider long-term average being below 20X.
So even if we give a 10-15% premium to historical valuation, 22X, 23X could be a comfortable valuation. We believe that after this result, commentary would be very important, wherein any positive outlook towards FY24 or US recession related commentary would be critical. Otherwise considering the past few commentaries of Accenture and a few other IT giants and head counts by various Amazon and all other top IT companies, it seems to be a slightly negative environment for the sector and valuations sustaining at premium level is not possible in this situation.
You think it is more of numbers related reaction which will happen on Tuesday but after two days, it will start following Nasdaq?
Yes on Tuesday we may see a range-bound reaction based on the mixed result, but post that and definitely in the next two-three days, other IT giants are also reporting their numbers and based on that, overall sector movement will be decided after these two-three key results comes out along with management commentary. The result may be great but going forward, FY24 outlook in this uncertain environment is more critical.
