 "Infosys vs TCS: How Q4FY15 results for the two IT majors compare")
The results of both the IT majors have been appreciated by the markets. Analysts had during the day upgraded Infosys’ target price after the company came out with a better-than-expected guidance. Though Infosys closed 5.7% higher, near its lowest point of the day after opening nearly 8.1% higher, analysts have raised their price targets.
TCS announced its results after markets closed on Monday and hence the resultant impact cannot be ascertained (Indian markets are closed on Tuesday for Mahavir Jayanti). However, TCS, which opened lower on account of a US trial in which the jury awarded close to $10 million in damages, closed the day at the day’s high after the company said it would contest the claim. Kotak Securities in a report on the event said that it prima facie does not see the US case as one of infringement. Analysts in general, too, were not particularly perturbed by the legal issue and have given the company’s performance a thumbs-up.
As the two IT companies compete for investor attention and money, we take a look at how they performed on various parameters in the March 2016 quarter.
Both TCS and Infosys beat analysts’ expectations on profits. Infosys posted a net profit of Rs 3,597 crore against estimates of about Rs 3,520 crore. TCS, too, recorded profit of Rs 6,341 crore, higher than expectations of Rs 6,300 crore. On the revenue front, TCS matched market expectations but thanks to a higher other income component the company was able to post better profit numbers. Thus, Infosys not only beat analyst expectation but also had a much better quality of earnings.
Revenue Growth
Given the difference in geographies the two companies cater to, it is better to compare revenues of the two companies in constant currency terms or comparing their volume growth. Infosys posted a constant currency growth rate of 1.9% sequentially for the March 2016 quarter. Volume growth for the company was 2.4%. TCS posted 2.1% QoQ growth in constant currency term and a volume growth of 3.2% during the same period. TCS seems to be leading the race on volume growth, strictly on a QoQ basis.
Realisations
Infosys had to take a 40 basis point hit on account of realisation while for TCS it was much higher at 1.1% (One basis point is one hundredth of a percentage point). Pricing pressure is expected to continue in the IT space going forward. Though TCS’ management said that it expects pricing to remain stable going ahead and do not expect power to return in the short run, analysts expect pricing pressure to build up as digitisation, automation and increased competition start having an effect.
Margins
Infosys posted a better-than-expected margin of 25.5%, mainly on account of improving utilisation rates, higher contribution of fixed price projects and falling attrition rates. TCS, however, disappointed on the margins front, posting lower-than-expected margins. Margins declined by 50 basis points to 26.1%, against expectations of 26.9%. A margin compression at a time of volume growth suggests that TCS is willing to go for business at the cost of sacrificing margins. However, the scale of the drop in margin will not go down well with analysts, though TCS management has said that cross currency impact led to 60 basis points being knocked off its margins.
Employee parameters
One key number that every Infosys tracker is looking at is the rate of attrition. Vishal Sikka seems to have plugged the leak with attrition at the consolidated level coming down to 17.3% as compared to 22.3% in March 2015 and 18.1% in December 2015. In comparison, TCS has an attrition rate of 14.7% in its IT services business. TCS management said that there will be an 8-12% wage hike this year. Infosys too is expected to have an aggressive 6-12% wage hike in order to bring down the attrition rate further.
Digitisation and Automation
Going forward the trend in IT space is clearly towards digitisation and automation. Both these companies have taken appreciable strides on this front. Infosys, with Sikka in the driving seat, has managed to bag orders worth $2.8 billion a growth of 45% over the last year. TCS posted a 15.5% QoQ growth and 52% y-o-y growth in its digital business which now contributes around 15% of the revenue and has crossed $2.3 billion. TCS management said that digital theme is picking up across all verticals and that its investment in digital is paying off. This is the space in which the two IT majors will be competing aggressively going forward.
Guidance
Infosys clearly scores higher since not only did it improve its guidance to 11.8-13.8% in dollar terms but also because it continues to give some benchmark for analysts to monitor. TCS has stopped giving guidance and has said that they expected FY17 to be a better year as headwinds of FY16 are behind it.
TCS announced its results after markets closed on Monday and hence the resultant impact cannot be ascertained (Indian markets are closed on Tuesday for Mahavir Jayanti). However, TCS, which opened lower on account of a US trial in which the jury awarded close to $10 million in damages, closed the day at the day’s high after the company said it would contest the claim. Kotak Securities in a report on the event said that it prima facie does not see the US case as one of infringement. Analysts in general, too, were not particularly perturbed by the legal issue and have given the company’s performance a thumbs-up.
As the two IT companies compete for investor attention and money, we take a look at how they performed on various parameters in the March 2016 quarter.
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Meeting analysts’ expectations
Both TCS and Infosys beat analysts’ expectations on profits. Infosys posted a net profit of Rs 3,597 crore against estimates of about Rs 3,520 crore. TCS, too, recorded profit of Rs 6,341 crore, higher than expectations of Rs 6,300 crore. On the revenue front, TCS matched market expectations but thanks to a higher other income component the company was able to post better profit numbers. Thus, Infosys not only beat analyst expectation but also had a much better quality of earnings.
Revenue Growth
Given the difference in geographies the two companies cater to, it is better to compare revenues of the two companies in constant currency terms or comparing their volume growth. Infosys posted a constant currency growth rate of 1.9% sequentially for the March 2016 quarter. Volume growth for the company was 2.4%. TCS posted 2.1% QoQ growth in constant currency term and a volume growth of 3.2% during the same period. TCS seems to be leading the race on volume growth, strictly on a QoQ basis.
Realisations
Infosys had to take a 40 basis point hit on account of realisation while for TCS it was much higher at 1.1% (One basis point is one hundredth of a percentage point). Pricing pressure is expected to continue in the IT space going forward. Though TCS’ management said that it expects pricing to remain stable going ahead and do not expect power to return in the short run, analysts expect pricing pressure to build up as digitisation, automation and increased competition start having an effect.
Margins
Infosys posted a better-than-expected margin of 25.5%, mainly on account of improving utilisation rates, higher contribution of fixed price projects and falling attrition rates. TCS, however, disappointed on the margins front, posting lower-than-expected margins. Margins declined by 50 basis points to 26.1%, against expectations of 26.9%. A margin compression at a time of volume growth suggests that TCS is willing to go for business at the cost of sacrificing margins. However, the scale of the drop in margin will not go down well with analysts, though TCS management has said that cross currency impact led to 60 basis points being knocked off its margins.
Employee parameters
One key number that every Infosys tracker is looking at is the rate of attrition. Vishal Sikka seems to have plugged the leak with attrition at the consolidated level coming down to 17.3% as compared to 22.3% in March 2015 and 18.1% in December 2015. In comparison, TCS has an attrition rate of 14.7% in its IT services business. TCS management said that there will be an 8-12% wage hike this year. Infosys too is expected to have an aggressive 6-12% wage hike in order to bring down the attrition rate further.
Digitisation and Automation
Going forward the trend in IT space is clearly towards digitisation and automation. Both these companies have taken appreciable strides on this front. Infosys, with Sikka in the driving seat, has managed to bag orders worth $2.8 billion a growth of 45% over the last year. TCS posted a 15.5% QoQ growth and 52% y-o-y growth in its digital business which now contributes around 15% of the revenue and has crossed $2.3 billion. TCS management said that digital theme is picking up across all verticals and that its investment in digital is paying off. This is the space in which the two IT majors will be competing aggressively going forward.
Guidance
Infosys clearly scores higher since not only did it improve its guidance to 11.8-13.8% in dollar terms but also because it continues to give some benchmark for analysts to monitor. TCS has stopped giving guidance and has said that they expected FY17 to be a better year as headwinds of FY16 are behind it.