TCS, Infosys, Wipro, HCL Tech, TechM shares: FY25 consensus EPS down sharply. What's ahead?
TCS, Infosys: The consensus 12-month forward earnings growth estimate for the two IT firms is currently at 11 per cent on expectations of large-deal led growth acceleration.
- Feb 23, 2024,
- Updated Feb 23, 2024 11:20 AM IST
The consensus earnings per share (EPS) estimates for top five IT firms including Tata Consultancy Services Ltd (TCS), Infosys Ltd, HCL Technologies Ltd (HCL Tech), Wipro Ltd and Tech Mahindra Ltd (TechM) are down 4-27 per cent over the past 12-months.
Despite this, JM Financial said the prevailing 12-month forward earnings growth estimates are at 11-55 per cent, higher than past inflection points, thanks to high expectations at the beginning of current downgrade cycle and hopes of recovery already built in.
In addition, current earnings growth is tracking well below last year’s forward estimates, it said adding that the trend looks similar to 2013-17 period for TCS and Wipro when sustained negative earnings surprises led to an elongated period of low stock return.
"We therefore believe that while the worst of earnings downgrades might be behind, there are still not enough evidence to suggest that actual earnings could meaningfully exceed current estimates," it said.
The brokerage said there is neither enough pessimism in the current estimates nor is there sufficient optimism in the environment for actual earnings to exceed these elevated expectations. These make the current situation an unlikely inflection point.
"Steep earnings cuts (due to weaker guidance) or sharp rebound in discretionary spend could possibly change that. In absence of those, current rally is unlikely to have more legs, in our view," it said.
JM Financial said the Q3 earnings raised hopes of earnings inflecting, driving up IT stocks. Its analysis of past 15 years’ earnings trends for top-5 players suggest that the best time to invest in IT Services stocks have been in and around these inflection points
(Exhibit 4).
"However, not every turn in earnings trajectory results in strong stock return. It is
therefore important to understand what characterises an inflection point. With the benefit of hindsight, we observe that stock returns are the highest when a trough forward earnings growth estimate (peak pessimism) is succeeded by strong actual earnings growth (positive surprise). In contrast, current 12-M forward earnings growth estimates for top-5 (11-55 per cent) are still high compared to historical troughs. Besides, current actual earnings growth is tracking below last years’ forward earnings (negative surprise)," it said.
Also read: Stock recommendations by analyst for February 23: Midhani, L&T and Nestle
Also read: Esconet Technologies shares: SME stock debuts with 245% premium on NSE
The consensus earnings per share (EPS) estimates for top five IT firms including Tata Consultancy Services Ltd (TCS), Infosys Ltd, HCL Technologies Ltd (HCL Tech), Wipro Ltd and Tech Mahindra Ltd (TechM) are down 4-27 per cent over the past 12-months.
Despite this, JM Financial said the prevailing 12-month forward earnings growth estimates are at 11-55 per cent, higher than past inflection points, thanks to high expectations at the beginning of current downgrade cycle and hopes of recovery already built in.
In addition, current earnings growth is tracking well below last year’s forward estimates, it said adding that the trend looks similar to 2013-17 period for TCS and Wipro when sustained negative earnings surprises led to an elongated period of low stock return.
"We therefore believe that while the worst of earnings downgrades might be behind, there are still not enough evidence to suggest that actual earnings could meaningfully exceed current estimates," it said.
The brokerage said there is neither enough pessimism in the current estimates nor is there sufficient optimism in the environment for actual earnings to exceed these elevated expectations. These make the current situation an unlikely inflection point.
"Steep earnings cuts (due to weaker guidance) or sharp rebound in discretionary spend could possibly change that. In absence of those, current rally is unlikely to have more legs, in our view," it said.
JM Financial said the Q3 earnings raised hopes of earnings inflecting, driving up IT stocks. Its analysis of past 15 years’ earnings trends for top-5 players suggest that the best time to invest in IT Services stocks have been in and around these inflection points
(Exhibit 4).
"However, not every turn in earnings trajectory results in strong stock return. It is
therefore important to understand what characterises an inflection point. With the benefit of hindsight, we observe that stock returns are the highest when a trough forward earnings growth estimate (peak pessimism) is succeeded by strong actual earnings growth (positive surprise). In contrast, current 12-M forward earnings growth estimates for top-5 (11-55 per cent) are still high compared to historical troughs. Besides, current actual earnings growth is tracking below last years’ forward earnings (negative surprise)," it said.
Also read: Stock recommendations by analyst for February 23: Midhani, L&T and Nestle
Also read: Esconet Technologies shares: SME stock debuts with 245% premium on NSE