Smaller Software and IT-enabled services fare far better than the big guns
The consolidated revenues reported by software companies have risen by 11.30% while the operating profit has risen by 13.94% in the September quarter. The consolidated net profits have risen by a stellar 22.40%.
Out of the 57 companies tracked by Moneylife, 50 companies have declared their results. Out of these, six have delivered revenue growth more than 20%. These are Eclerx Services, Blue Star Infotech, Tata Elxsi, Zensar Technologies, Hinduja Global Solutions and Mindtree.
On the operating profit front, 15 companies have delivered a growth of more than 10%, out of which nine have delivered a growth of more than 20%. The relatively bigger names which have reported operating profit growth of more than 20% are Zensar Technologies, Persistent Systems, Tata Elxsi and Hinduja Global.
Eclerx Services Ltd. has shown the highest revenue growth in the sector with its revenues rising 33.57% from 201.78 crore to 269.52 crore. The markets seem to have rewarded this growth with its market capitalisation having gone up by 38.11% from November 13, 2014 to November 15, 2015. However, it has registered a modest operating profit growth of 5.25% and a net profit decline of 10.27%.
Tata Elxsi has been a star performer with its market cap having almost tripled during the period. Its revenues have risen by 28.06% from 205.88 crore to 263.66 crore while its operating profits have risen by more than 50% from 40.38 crore to 61.28 crore. The other notable performers are OnMobile Global and Ramco Systems, whose market-cap has doubled during this period.
Among the Nifty 50, there are five major software companies – TCS, Infosys, Wipro, HCL Tech and Tech Mahindra. These have delivered a consolidated revenue growth of 12.91% and an operating profit growth of 11.78%. All of them reported growth in revenues, while HCL Tech was the sole company which reported decline in operating profit. TCS led the pack with the company reporting 17.6% growth in sales and 19.5% growth in operating profit. CMC results are merged with TCS during the period.
The consolidated market-cap of companies in the software sector has fallen marginally by 1.71% from 13 November 2014 to 13 November 2015. This fall in market capitalisation coupled with rise in profitability has led to valuations becoming attractive in some cases. The consolidated valuations, measured by MC/OP, declined from 18.56 times as on 13 November, 2014 to 16.01 times as on 13 November, 2015. PE has fallen to 16.22 times from 20.18 times a year ago.
Though this article presents a consolidated picture of the software industry, some caution is needed while interpreting quarterly growth in net profit, which has risen by 22.40%. The reason is that these numbers are heavily influenced by growth in net profit of two tech majors – Infosys and Tech Mahindra. Infosys' profits have jumped by 87.4% from 3365 crore to 6306 crore largely due to an exceptional gain of Rs3,036 crore relating to transfer of business of EdgeVerve Systems Ltd., its wholly owned subsidiary. Tech Mahindra's corresponding profits have jumped by 62.4% from 589.47 crore to 957.27 crore.