Weaker volumes and lower billing rates next year could keep profits under pressure.
With the rupee depreciating sharply in recent months, tech stocks are back in focus. Mid-cap IT stocks, in particular, have rallied smartly over the past week. Since the start of the year, Tata Consultancy Services(TCS) is up 2.65 per cent but Infosys has been the bigger winner, having gained 13 per cent. Looking back, Infosys has lost just 2 per cent in a year, whereas TCS has given up 37 per cent.
At Rs 1,297, Infosys trades at a price earnings multiple of 12 times estimated 2009-10 earnings, while TCS trades at 9 times.The valuation gap, which has never really narrowed expect for brief periods, is a reflection of Infosys’ superior operating profit margins — in the December 2008 quarter, the company’s margins rose 200 basis points sequentially, to 35 per cent. TCS’s opm, on the other hand, was up 50 basis points, at 26.8 per cent.
In the coming year, both firms will see lower billing rates and will also struggle to grow volumes — Infosys and TCS saw volumes rise just 2 and 2.5 per cent q-o-q, respectively, during the December 2008 quarter, an indication of things to come. Unless they trim salaries and save on other overheads, therefore, margins will be under pressure.
Already, a couple of projects are believed to have been cancelled, while a few have been delayed. TCS, which has a fairly large exposure to the financial services space, has reportedly indicated that the June quarter is unlikely to see a fall in volumes. Nevertheless the USA remains the biggest market for both companies and a recent Forrester report says the US IT market will grow by just 1.6 per cent in 2009, far lower than the 4.6 per cent in 2008.
TCS is expected to grow revenues about 3-4 per cent next year over the Rs 27,900 crore expected to be posted this year. For Infosys, net sales in 2009-10 are expected to rise just marginally over the Rs 21,000 crore estimated in the current year. Both companies, however, could see a fall in net profits, though the drop could be sharper for TCS.