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Over the past two days, all shareholders in India's largest information technology services provider, Tata Consultancy Services (TCS), have made a total of Rs 18,417 crore, with the stock up 4.4 per cent, in anticipation of a better second quarter performance.
TCS has kept pace with the expectation, delivering one of the best sets of numbers the company has reported so far. The volume growth is 7.3 per cent for the September quarter, one of the highest in the past nine, and the highest operating margin in that period, at 31.6 per cent.
An all-round performance and strong operational efficiencies enabled TCS to outpace Infosys on all fronts for another quarter. The company continued to widen its revenue margin over Infosys (62 per cent higher) and in Ebitda (earnings before interest, taxes, depreciation and amortisation, leading by nearly 550 basis points) for the quarter.
While Infosys did well on revenue growth, its net profit and margin performance fell short. TCS, however, witnessed robust volume growth, good margin expansion and net profit growth. Recovery in key markets such as America and Europe, with a sharp fall in the rupee against the dollar, have aided the performance of both these IT giants.
"What has worked for us is our diversified portfolio. We have presence in 10 verticals and all the engines are working in all the markets. It is a good environment for the sector. The primary reason is because everyone has a redefined future and how they go about it is different," said N Chandrasekaran, managing director and chief executive officer of TCS, on the growth numbers.
The two companies, though, had a divergent outlook. While the TCS management continued to exude confidence on future growth, Infosys maintained the upper end of its dollar revenue growth forecast (‘guidance’) at 10 per cent. Analysts believe, at the top end, the guidance implies a revenue fall of 0.8 per cent for the next two quarters. While most analysts expect Infosys to manage the lower end of the Nasscom (the IT industry body) guidance of 12-14 per cent for this financial year, TCS is expected to beat the upper range significantly.
“We believe TCS, with its dominant positioning in BFSI (banking, financial services and insurance) and well-diversified revenue profile across verticals/service lines, is well positioned to record sector-leading revenue and EPS (earnings per share) growth in an improving demand scenario,” says Rishi Jhunjhunwala, IT analyst at Goldman Sachs. The stock made a new 52-week of Rs 2,258 on Tuesday, its third new 52-week high in as many trading sessions.
TCS has kept pace with the expectation, delivering one of the best sets of numbers the company has reported so far. The volume growth is 7.3 per cent for the September quarter, one of the highest in the past nine, and the highest operating margin in that period, at 31.6 per cent.
An all-round performance and strong operational efficiencies enabled TCS to outpace Infosys on all fronts for another quarter. The company continued to widen its revenue margin over Infosys (62 per cent higher) and in Ebitda (earnings before interest, taxes, depreciation and amortisation, leading by nearly 550 basis points) for the quarter.
While Infosys did well on revenue growth, its net profit and margin performance fell short. TCS, however, witnessed robust volume growth, good margin expansion and net profit growth. Recovery in key markets such as America and Europe, with a sharp fall in the rupee against the dollar, have aided the performance of both these IT giants.
"What has worked for us is our diversified portfolio. We have presence in 10 verticals and all the engines are working in all the markets. It is a good environment for the sector. The primary reason is because everyone has a redefined future and how they go about it is different," said N Chandrasekaran, managing director and chief executive officer of TCS, on the growth numbers.
The two companies, though, had a divergent outlook. While the TCS management continued to exude confidence on future growth, Infosys maintained the upper end of its dollar revenue growth forecast (‘guidance’) at 10 per cent. Analysts believe, at the top end, the guidance implies a revenue fall of 0.8 per cent for the next two quarters. While most analysts expect Infosys to manage the lower end of the Nasscom (the IT industry body) guidance of 12-14 per cent for this financial year, TCS is expected to beat the upper range significantly.
“We believe TCS, with its dominant positioning in BFSI (banking, financial services and insurance) and well-diversified revenue profile across verticals/service lines, is well positioned to record sector-leading revenue and EPS (earnings per share) growth in an improving demand scenario,” says Rishi Jhunjhunwala, IT analyst at Goldman Sachs. The stock made a new 52-week of Rs 2,258 on Tuesday, its third new 52-week high in as many trading sessions.
At Tuesday’s close, the TCS scrip was valued at 24 times the FY14 estimated earnings and seems to adequately capture the strong growth prospects. Infosys on the other hand, needs a consistent performance for the next few quarters to warrant a re-rating. The stock trades at 18 times FY14 estimated earnings. Analysts believe TCS’ premium valuations over Infosys are likely to sustain.
While revenue momentum at TCS was driven by a strong sequential volume growth of 7.3 per cent, Infosys’ volume growth was much lower, at 3.1 per cent. TCS won eight large deals in the quarter; Infosys bagged five.
Interestingly, TCS’ revenues in each of its key operating regions, as well as verticals, posted over 10 per cent revenue growth. Continental Europe (up 31.8 per cent sequentially), BFSI (up 17 per cent) and media & entertainment (up 23.9 per cent) were key contributors. In the case of Infosys, the manufacturing and BFSI verticals led the growth (up 6.8 per cent and 4.2 per cent, respectively).
TCS saw a strong 300 basis points (bps) Ebitda margin expansion to 31.6 per cent. This metric fell by 40 bps to 26.1 per cent in Infosys. The sharp rupee depreciation and improving employee utilisation were key contributors to TCS’ handsome margin expansion. Commendable, as it negated the impact of promotions and integration of the lower margin Alti acquisition.
Ankita Somani, IT analyst at Angel Broking, says: “We believe Infosys needs to show margin improvement. The company has been struggling on this front over the past few quarters. TCS on the other hand, has continued with its margin expansion for another quarter.”
Pay rises and higher investments negated the positives of rupee depreciation, leading to the margin contraction at Infosys. Analysts expect its margins to be under pressure, as the company continues investments to strengthen its deal pipeline.
Thanks to these investments and a one-time provision (of Rs 219 crore) towards visa matters, Infosys’ net profit growth remained muted at 1.4 per cent sequentially, to Rs 2,407 crore. TCS, on the other hand, raced away with a net profit growth of 20.7 per cent to Rs 4,633 crore over the previous quarter. This growth was a function of strong revenues and Ebitda margin expansion.
