IT Industry: Growth in Bits, Not Bytes | CORPORATE ETHOS

IT Industry: Growth in Bits, Not Bytes

By: | August 24, 2017
ITbank

The Indian information technology (IT) industry is going through tough times may be for the second time after the tech slowdown of 2000 when several dotcom companies lost their share value or went bust.

Loss of revenues in traditional business, disruptions caused due to automation, machine learning artificial intelligence and robotics, slow growth in new digital opportunities have added to the misery. Industry fears traditional jobs of programmers and coders may be at stake impacting the service industry that provided such resources in the past for a global market.

sreekumar-photoThe forced resignation of Vishal Sikka from Infosys, share buybacks, layoffs close to 100,000 reported in top IT firms such as Cognizant, Wipro, Infosys, HCL, Wipro, Tech Mahindra among others have created an atmosphere of fear and anxiety.

Amidst this uncertainty about the present and future growth, here is a look at the prospects of prominent IT majors

Infosys Ltd (BSE: 500209, NSE: INFY) Category: Large Cap

Infosys founded in 1981 by a group of first generation entrepreneurs led by N R Narayanamurthy, Kris Gopalakrishnan, Shibu Lal, Nandan Nilekani among others. It has become a global brand and leader in technology services and consulting.

Over the years, it has transformed itself from being a coding company to creator of IT products, introducing knowledge-based AI platform and looking set to tap new opportunities in knowledge-based IT, robotics and automation.

The June quarter results were a bit disappointing with an annualized net profit growth of 1.37% at Rs 3,483 cr. Sales rose 1.76% to Rs 17,078 cr. On a returns perspective, monthly, quarterly and half-yearly performance is negative and below industry average.

Return on equity of 20.80%, on assets of 21.44%, net profit margin of 20.95% is commendable while liquidity ratio is on par with peers and cash flow is positive. Promoters hold 12.75% stake. The advantage of Infosys lies in the cash reserves which it is utilising to buy back 11,30,43, 478 shares for a value of Rs 13,000 cr.

Presently, the scrip is undervalued with a price earnings multiple (PE) of 14.3. On technical charts, Relative Strength Index (RSI) of 32.46 is bearish while MACD line has witnessed a bearish cross over. Average Directional Index (ADX) of 22.40 indicates range bound trading. A stochastic indicator of 13 indicates oversold conditions. The scrip is trading below the 50 DMA of 962.74.

Target: 962           Duration: 6 weeks          Strategy: Buy/Hold

Wipro Ltd (BSE: 507685, NSE: WIPRO) Category: Large Cap

Wipro Ltd was established in 1945 as a vegetable oil company and they subsequently moved to IT hardware and software products. Under the able leadership of Azim Premji it has now become a global leader in IT solutions and services. The consulting services include systems integration, application development and maintenance, technology infrastructure services, package implementation and R&D services.

Net profit for June quarter was Rs 2082.60 cr representing a modest annualised growth of 1.50% while slipping over 8% on quarter-on-quarter basis. Monthly returns of 1.99%, quarterly 11.95%. half yearly return of 22.86% is above industry average. Financial, liquidity and cash flow ratios present a mixed picture with net profit margin of 15.31% quite commendable. Promoters hold 73.25% stake. It is currently trading at a PE of 17.34 indicating it is undervalued by the market.

On technical charts, RSI of 63.90 is bullish, MACD has witnessed a bearish crossover while ADX of 41.26 indicates uptrend, stochastic indicator of 29.30 is indicative of weakness in the counter. On a positive note prices are trending above the 50 DMA of 273.12.

Target: 275    Duration: 6 weeks               Strategy: Hold/Sell

Cyient Ltd (BSE:532175 NSE: CYIENT) Category: Mid Cap

Cyient Ltd, founded in 1991, provides solutions for engineering, manufacturing, geospatial work, network and operations management to global industry leaders. Its business is spread across 21 countries in 41 locations and a client base of 300.

In June quarter, it has reported a net profit growth of 18.70% at Rs 87.80 cr while earnings per share has risen sharply to 7.77. Sales rose 8.77% to Rs 903.40 cr. On a returns perspective, the performance is not commendable in the near to short term but quite impressive on half-yearly basis at 8.4%. PE of 21.61 indicates the market has given a moderate pricing.

Financial, liquidity and cash flow ratios present a mixed picture with a return on equity of 16.23%, assets 11.69%, net profit margin of 9.58 while liquidity and cash flow ratios are not admirable.

On technical charts, RSI of 49.74 is neutral to bearish while MACD line has witnessed a bearish crossover and stochastic indicator shows a positive figure of 50. Presently, trading near to 50 DMA.

The charts are indicative of a head and shoulders pattern and seeing a reversal in trend which is likely to take scrip higher.

Target: 546       Duration: 4 weeks       Strategy: Hold/Buy

Tech Mahindra (BSE: 532755   NSE: TECHM) Category: Large Cap
The US$ 4.4 bn Tech Mahindra Ltd was established in 1986 by the Mahindra & Mahindra group with the objective of providing IT solutions for the industry worldwide. It is focussed on the digital technology such as digital banking, smart cities and big data analytics.

The company reported lower net profit for June at Rs 791.79 cr while sales rose 6% to Rs 7336.10 cr. On a returns perspective. 11.31% monthly and 6.54% quarterly is above peer average while half-yearly returns aren’t encouraging.

The company scores well on return on equity at 17.11%, return on assets 11.88%, and net profit margin of 9.65%. It fares poorly on liquidity and cash flow ratios. Promoters hold 36.16%. It is valued lower by the market indicated by PE of 13.78.

On technical charts, RSI of 73.47 indicates bullishness, MACD has witnessed a bullish crossover, ADX of 35 indicates uptrend, stochastic indicator is in overbought position at 88. Prices are trending above 50 DMA of 394.92.

Target: 500   Duration: 6 weeks     Strategy: Hold/Buy

Summary

Technology conceptThe industry is at a critical juncture- on the one hand artificial intelligence (AI) and robotics are taking over the work of programmers and coders, while new opportunities are slow in emerging in AI, machine learning. Lot of churning is taking place and in the end only those who innovate and strategize with new solutions can hope to remain on top. The IT majors are cash rich as can be evidenced from the buyback of shares by Infosys, TCS and Wipro. This leaves a doubt as to whether the same money could have been invested for future growth. It may take a while for the dust to settle and stability to be brought back to the industry.

As of now the industry has to content with single digit growth as in 2016-17 with 7.6% at sales turnover of $11 bn. In the current financial year, NASSCOM expects 7-8% growth a far cry from the double-digit growth witnessed in the previous years. The BSE Information Technology Index is moving up and trade volumes remain high in this sector. Nifty IT Index is still going strong but displaying flat trend at 10,442.40.