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Blockbuster IT Earnings

The IT sector has been on a roll this Q3! The good times continue with both Wipro (+6%) and HCL Technologies (+3%) surging. Wipro had an okay-ish performance that slightly beat Street estimates, while HCL absolutely KILLED it in what should be a weak quarter. 📊

But it’s the promise of a bottoming out and an upturn that has markets excited. Here are the deets on their Q3 report card. 💯

Wipro: First, the not-so-great stuff. A 4.4% YoY drop in the top line (Rs 22,205 cr) and 12% YoY drop in profit to Rs 2,694 cr. That said, operating margins (16%) contracted less than expected. Also, total deal wins in the quarter stood at $3.8 billion. This is similar to what it reported in the Sept quarter and came in HIGHER than Infosys’s $3.2 billion TCV. Finally, strong bullish management commentary lifted sentiment. The commentary has also convinced investors that the worst is over for its key consulting vertical. 💪

HCL: The company put up a good show this quarter, beating all analyst estimates. Its top line grew +6% QoQ in constant currency times. Both revenue and profit grew YoY at 6%+. Operating margins also expanded to 19.8% QoQ. The company was also the ONLY firm out of the ‘top 4’ to report an INCREASE in headcount (+3,818 freshers). Others are reporting a decline, while some like Infosys have stopped all campus hiring this year. That said, the only sour notes were a narrowing of its FY24 revenue guidance (5%-5.5% vs 5%-6% earlier). 👌

Big Picture: Yes, people are really excited to get into large cap IT stocks now. And there’s no doubt there’s a little FOMO for those who hadn’t gotten in. But most experts say wait another quarter to decide whether you want to take the plunge.🤓

A Tasty Deal?

Tata Consumer Products announced two new acquisitions worth 7,000 cr. The company will buy Capital Foods for Rs 5,100 cr. PS – Capital Foods owns Indo-Chinese brands like Ching’s Secret. Tata also said it would acquire FabIndia-backed Organic India for Rs 1,900 cr, which focuses on herbal tea, supplements and organic food. ☕️

Acquiring solid brands over trying to build a new one is the current market playbook. On paper, both these deals are a good fit. Tata Consumer has been slowly losing market share in its core ‘tea’ segment. This is due to increased competition from HUL and local rivals. Organic India’s business is a good way to plug gaps in the tea biz and lure premium customers. 📈

Capital Foods is also a solid win: it has key products in instant noodles, powders and sauces. FYI – if you go by reports, Tata Consumer beat out Nestle and ITC to acquire this company. Tata doesn’t have strong products in this category, so it fills out a neat empty space for the firm and also gives it a seat at the ‘big kids’ table. 😎

Despite this though, the stock was down 1% today. This was partly due to profit-booking (the stock was up 3% on Friday). But also because the fine print is becoming clearer and there are a few problems. 🔍

What are the sore points? For starters, the deals will require significant borrowings of Rs 5,000 cr. As Ambit Capital points out: This will be arranged via rights issue which would lead to equity dilution and impact return ratios. 👎

For Organic India, there are valuation concerns. The deal is being done at 35-40x FY26 EBITDA. On top of this, over 40% of its current revenue comes from the US market, which is not exactly a high-growth area. A lot will depend on how Tata can scale up both brands in the years ahead. 📊

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