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What to do with IT stocks post Q3 results?

by Tavaga Invest

Markets this week ๐Ÿ“Š

This was a special week, not for the markets ofcourse, but Indians celebrated as RRR Naatu Naatu soundtrack triumphed at the Golden Globes. 

Inflation data for both US and India were as cool as cucumber. While rate hikes will continue in 2023, but the feeling of โ€œworst is behind usโ€ is liberating. 

Markets continued to oscillate up and down and finally closed in green. Mid caps however continued in red for 2023. FIIs have offloaded more than $1 billion since 2023. 

For the next few weeks, we will dig deeper into the Q3 earnings giving insights on how to play various sectoral themes for 2023. As always, if you have any queries regarding your portfolio, book a call with us and we shall be happy to help.

Letโ€™s now dig deep into some of the important news that made headlines this week.

Time for desi iPhones? ๐Ÿ“ฑ

What happened: Tata Group is close to acquiring Wistronโ€™s iPhone manufacturing unit in Karnataka for 4000-5000cr, which will give India its first desi iPhone maker. Tata Group is aiming to complete the acquisition by March end. 

Wistron?: Along with Foxconn and Pegatron Corp., Wistron is one of three Taiwanese iPhone contract manufacturers with sizeable manufacturing operations in India. 

What’s in it for Apple? Apple is looking to cut its reliance on China, where its operations have been severely hampered by supply chain problems.

Expansion plan: If the deal goes through, Tata will acquire all eight of the iPhone lines as well as the 10,000 employees who work at the plant. Tata has also increased hiring at its factory in Hosur, close to Bangalore, where it makes components for the iPhone. The first Apple store in India, which will open in Mumbai this quarter, has also been revealed by Tata as a part of its expansion plans. 

Our Take

With the recent release of the Tata Neu application and other e-commerce initiatives, the Tata Group is attempting to become more technologically oriented. The group also declared its intention to start manufacturing chips. If this acquisition goes through, Tata group will have control over manufacturing, assembly, and retailing as it already has an iPhone component manufacturing factory and is planning to open Apple stores in the near future.


Goldman is trimming down ๐Ÿ”ช

What happened: Investment banking giant Goldman Sachs to laying off 3200 employees (7% of its workforce) this week making it the biggest cost cutting exercise since the 2008 financial crisis. More than a third of this is likely from its trading and banking units. But the firm is not alone. Merger activity and banking fees have taken a hit across Wall Street with top 10 investment banking firms seeing fees fall by 39% in 2022. Morgan Stanley too trimmed 1600 workers. 

Who is the culprit? Goldman Sachs is no ordinary firm when it comes to banking. But slowdown in several business lines, an expensive consumer banking foray and recessionary fears have forced it to go down this unglamourous route.

Bonuses to be hit: Layoffs are likely to be accompanies by cut down in bonuses, a stark contrast from last year, when big bonus were showered. Infact, Goldman CEO, Solomonโ€™s, was one of the  highest paid CEO for a major US bank in 2021.

Not all is bad: Goldman is expected to report a 46% drop in profits, but its trading desks have reasons to cheer. The trading division is expected to post a 14% jump in revenue for 2022, bring in more than half the firmโ€™s total revenues. Banking fees however to slump by more than half. 

Our Take

Goldman Sachs is not the only company slashing jobs, tech and media sectors have already seen the pain last year. Rate hikes have led to rise in cost of borrowing, and less investment banking activity. The usual source of funding for these banking deals is fixed-income securities such as bonds whose value also decreases with rate hikes again resulting in difficulty to raise money for companies. 


Microsoft jumps into AI wagon ๐Ÿ‘Š

What happened: Our Mr. cool Microsoft is prepping for its largest startup investment in history: a $10 billion stake in OpenAI, valuing the research lab at $29 billion.

Whatโ€™s OpenAI? Creator of potentially groundbreaking AI tools like ChatGPT, the multitalented chatbot that can code in Python and help high schoolers cheat on English essays. And FYI, ChatGPT went viral upon its release in November, 1M+ people signed up to test the chatbot in the first 5 days.

Details: As per reports, Microsoft to keep 75% of OpenAIโ€™s profits until it recoups its investment. After that, it would own a 49% stake in the company. Microsoft already invested $1B in OpenAI in 2019, but wants a closer relationship to compete with its rivals like Google. Incorporate ChatGPTโ€™s chatbot into its unpopular search engine, Bing, as well as integrating into its Office suite like Word, Excel Powerpoint etc. is on the cards. Just imagine telling Excel to run a valuation model on your favorite stock.

Our Take

Every 10-15 years, some shiny new technology creates a buzz and changes the world, reaping riches for shareholders. But will Microsoft win this race is difficult to predict? Afterall, first-mover advantage doesnโ€™t always hold true. We have learned that in Appleโ€™s smartphone supremacy case. Plus OpenAI has plenty of critics and is not sophisticated yet, to give Google sleepless nights. Will this newest fad make people use Bing more than just for โ€œchange default search engineโ€? We shall find out!


Time to play the IT theme post Q3?

What happened: 3 IT majors posted their results this week. Q3 is typically a weak quarter for IT. FYI, Nifty IT was down 25%+ last year. Worldwide recessionary fears, high attrition rates and employee costs were some of the factors which dragged down the sector. 

TCS: Revenues beat expectations but profits disappointed. Order booking increase of 2.6% YoY is not exciting. TCS employee base declined for the first time in two years indicating growth moderation ahead as Hiring is often a lead indicator of growth. Book to bill ratio also moderated QoQ, implying slowdown in incremental orders versus billing.

Infosys: Results were better than TCS. Revenues up 20% YoY & profits up 13%, beating estimates. FY23 revenue guidance revised upwards. Attrition rates dropped sharply from 27% to 24%, albeit still higher than TCS. Infy hiring was better but tepid but margins remained flat. 

HCL Tech: Revenues and Profit were up 19% YoY, beating estimates. Attrition rates also dropped and EBIT margins improved sequentially. But a downward revision in FY23 guidance dampened the mood. 

Our Take

How to play the IT theme in 2023? The orders and hiring trends indicate a sober to moderate 2023 after two relatively strong growth years. Companies are no longer rushing to fill vacancies or poach employees. Clients are also delaying decisions on new projects. Growth slowdown is imminent which will reflect in about 7-8% revenue growth going forward compared to 13-15% in FY23. 

It’s still early to take a conclusive view on the FY24 outlook as IT budgets are yet to be finalised. Looks like there is another 1-2 quarters of pain before a rebound. Best to bet on big majors with a full spectrum of services who can withstand the slowdown better.

What else made news?

๐ŸŒŽUPI goes international: NRIs from 10 countriesโ€”including the US, UK, Australia, and Canada who have Indian bank accounts will soon be able to use UPI with their international mobile numbers.

๐Ÿ“‰Paytm woes continue: Stock price crashed 8% after 3.1% equity exchanged via block deals. Alibaba Group was likely the seller. 

๐Ÿฅ‡Gold loses sheen: Indiaโ€™s Dec gold imports slumped 79% as price rise depressed demand. Gold futures touched record highs to 56,245/10g, surpassing the previous record of Augโ€™20.

๐Ÿš˜Glam show: The annual Auto Expo is underway in New Delhi with highlights being: TaMo unveiling 12 cars including 5 EVs and Maruti introducing an electric SUV concept.

๐Ÿ’ธStake buy: Zerodha buys 1.26% stake in RBL Bank in Q3. It also reported an impressive net profit of Rs 2,094 cr (up 87% you) for the quarter.

๐Ÿ’ชRecession proof: Rolls Royce reports highest sales in 118 years. Company says no slowdown in spending by the wealthy. 

Hope you liked reading this weekโ€™s wrap. See you next week. Till then, hope you have a great weekend!


Ruchi Mehta


Disclaimer: This write-up is solely for educational purposes. This in no way should be construed as a buy/sell recommendation. Please consult your investment advisor before investing.

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