 "TCS outshines Infosys again")
Infosys may have set the tone for a better story for the information technology industry, but the country’s largest IT services firm Tata Consultancy Services (TCS) has taken the growth story to another level.
TCS not only continued its strong run, but also did better than consensus estimates on earnings as well as revenue growth for the quarter ended June 30, 2013. Strong volume growth of 6.10 per cent surprised analysts who were building in about 4 per cent sequential volume growth ( versus 4.1 per cent for Infosys) for the June quarter.
This helped TCS post revenue growth of 9.5 per cent sequentially to Rs 17,987 crore. The higher volume growth is commendable given the subdued macro environment for the IT sector. TCS’ net profit growth, too, came in at a robust 5.9 per cent as against a marginal slip in Infosys’ profit (see table).
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While Infosys had managed to beat the already muted expectations when it announced its results last week, TCS' performance is much superior on all fronts. The tone of their management commentary also clearly indicates the shape of things to come. While Infosys management remains cautious about the future outlook (despite some signs of pick up in discretionary spending), the TCS management appears full of confidence. TCS has been delivering a broad-based all-round growth consistently thanks to its well-diversified business model. Thus, the valuation gap between the two is likely to sustain going forward.
“TCS has reported yet another solid quarter. The sector scorecard is so far 2/2 on revenue performance with both Infosys and TCS delivering good numbers. TCS’ start to the year (already at 16 per cent year-on-year profit growth) as well as commentary suggests much greater confidence on growth going ahead. A weak currency is also providing solid buffer to margins and overall on the core operating front, TCS looks well placed,” said Nimish Joshi of CLSA in his note.
Notably, the TCS stock has made new highs in each of the past two trading sessions, and hence, analysts believe significant upsides in the scrip remain capped. The TCS scrip trades at 19.2 times FY14 estimated earnings while the metric stands at 16.3 times for Infosys. Despite attractive valuations, analysts believe Infosys needs to deliver consistent performance over the next few quarters to warrant a strong re-rating.
Ankita Somani, IT analyst at Angel Broking says, “Strong show by TCS indicated that its premium valuations over Infosys are justified and here to stay. Contrary to its peers, the TCS management does not sound cautious at all. Even after being the largest company, they are still growing better than their peers.” After today’s strong show, analysts could revise upwards their FY14 estimates for TCS marginally.
On the macro front though, stricter visa norms by US and other countries can impact the revenues as well as profitability of Indian IT companies. The final shape of the US immigration bill will most likely be known by end of 2013. Infosys may look at buying out a US- based company to reduce the impact of stricter visa norms, while TCS is already working on this to minimise the impact. Its strategy on this front will be keenly watched.
While feeling confident over TCS' medium-term prospects, analysts say the US immigration bill remains an overhang for the stock and hope the company would be able to handle the immigration bill impact well. “TCS’ management remains ‘very positive’ in its outlook for the rest of the year and maintains that FY14 revenue growth will pick up over FY13. US immigration overhang remains the key concern for the company, but the management expects that it will be able to handle any changes to immigration rules without resorting to extreme measures,” said Divya Nagarajan of UBS Securities Asia in her note.
N Chandrasekaran, CEO and MD of TCS, "Discretionary spends in the US are much better than Europe. We are extremly well positioned. We look forward to an exciting year. We see a good pipeline and demand for the next few quarters. We maintain that we will do better than the Nasscom guidance growth of 12-14% for FY14."
S D Shibulal, CEO, Infosys: "the challenge is volatality in our performance. One quarter cannot be seen as a secular trend."