Year and Q4 results keenly awaited as guide to IT sector drivers, extent.
As Indian information technology (IT) services companies get ready to announce their fourth quarter and 2010-11 results, the street is keenly awaiting those of the two largest, Tata Consultancy Services and Infosys.
Since 2007-08, TCS has been ahead of Bangalore-based Infosys in terms of top line growth and margin expansion. According to a Citi Investment Research & Analysis study, TCS has led on revenue growth (2009-11) by almost five per cent and managed to increase its margins by 400 basis points, while Infosys margins have remained flat.
For 2009-11 (FY11 being nine-month annualised data), Infosys has grown at a compounded annual growth rate of 13 per cent, while TCS is 15 per cent, the study states.
The consistent delivery on revenue and margins for the past two years narrowed the difference in both companies’ rating. For the period spanning April 2006 to December 2008, TCS rating was at a discount of almost 30 per cent to Infosys.
But with a management change in 2008 and a much more aggressive approach, TCS has been re-rated by the market and today is at a premium of almost five per cent to Infosys.
But with discretionary spending kicking in, some analysts believe Infosys will be in a better position to lead in 2011-12. “Q4 (fourth-quarter) results of Infosys will be watched keenly because of its guidance (prediction) for the next financial year. But we believe they will do better in FY12, due to pick-up in discretionary spend. We also think one of the biggest trouble areas for Infosys has been telecom (primarily due to BT), which should get sorted this financial year,” said an analyst from a leading brokerage firm, on condition of anonymity.
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Parameters
Accenture, in its recent quarter results, reported a 20 per cent year-on-year growth in its consulting business. Similarly, global companies such as Oracle and SAP have also indicated healthy licence sales, which analysts feel is good for Indian IT service companies.
Consultancy and package implementation, that forms the discretionary spending, is much higher in the case of Infosys than TCS. For Infosys, consulting and package implementation is 26 per cent of revenue, compared to 17 per cent in TCS.
The problem area for Infosys has been the telecom sector. TCS has done a better job of the rebound in the sector that started in 2010-11.
“Even if you see the FY11 numbers of both, the gap has narrowed. We expect TCS to clock revenue growth in the range of 31-32 per cent, whereas Infosys would be around 26 per cent. For FY12, we are expecting both to clock a top line growth of 23-25 per cent,” said another analyst of a leading Indian private sector bank.
Analysts believe the chances of a change in the TCS re-rating are few. “I think, TCS will continue to be at a premium to Infosys. One reason is that they have managed to get their margins up. Also, we think TCS can still improve its margin further,” said another analyst.
Catch-up debate
However, others differ. “TCS has done a commendable job of taking margins up in the past two years. We believe it will be difficult to improve it any further. In fact, the company may even face challenges in sustaining margins at such high levels, given that the management comfort level is 27 per cent. Infosys, on the other hand, has delivered an eight-year track record of sustaining margins,” said Surendra Goyal and Vishal Agarwal of Citi on their report.
Agrees Pralay Das of Elara Capital: “We also feel Infosys will be able to bounce back. One reason is higher exposure to consulting and packaged implementation. The other facet is that Infosys is in a better position to improve margins. While TCS has improved on this, I think they have run out of levers to manage margins.”
Adding: “TCS has also scored in terms of volume growth. But we expect the margin to narrow in this segment, too. We think Infosys will be at par with TCS in volume growth, going ahead.”
While Infosys is clearly focused on a catch-up game, the street is keenly watching how TCS will maintain its lead.