Industry-leading volume growth, strong deal pipeline and a confident management outlook marked Tata Consultancy Services’ (TCS’s) September quarter results. The company steered ahead of peers such as Infosys and HCL Technologies on all fronts, making it a preferred pick of most analysts.
Ankita Somani, information technology (IT) analyst at Angel Broking, says: “The TCS results were strong and they have continued with growth momentum. Volume growth surprised us positively and it came in largely from the company’s expanded footprint in emerging markets such as Latin America, the Asia-Pacific and the Middle East. We believe the margin decline is not significant. We are positive on TCS and maintain a Hold call but we believe premium valuations limit significant upsides for the scrip.” Somani has a target price of Rs 1,400 for TCS.
While Infosys trimmed its full-year dollar revenue as well as earnings expectations, the TCS management expects to grow higher than Nasscom projections of 11-14 per cent revenue growth for the IT industry. HCL Technologies’ management is also confident of future growth; it believes any pick-up in the discretionary space could push up growth rates even more. Analysts believe there are no near-term triggers for Infosys and recovery might still be some time away. On the other hand, continued traction in its infrastructure management business makes HCL well-poised for strong growth.
Comparisons
Yogesh Aggarwal, IT analyst at HSBC Global Research, says, “We believe, unlike peers, HCL Technologies' investment case at this stage is less dependent on the macro-recovery. As per TPI, deal signings have remained strong in the restructuring space. HCL has a marked lead in this area due to the prominence of IMS (infrastructure services) among the restructured deals and HCL's experience and strong references in this space. In that regard, HCL Technologies' earnings could be more resilient in the near term. Absolute returns, however, will be gradual and contingent on roll-over to FY14 estimates and sustenance of the current margin performance."
Robust volume growth and a healthy deal pipeline characterised TCS and HCL results. TCS witnessed the strongest volume growth of five per cent in the September quarter, followed by HCL. TCS won a robust 11 large deals in the quarter. As for HCL, consequent to its aggressive go-to market strategy, HCL posted strong volume growth of 4.5 per cent, in addition to signing a robust 12 large deals in the quarter. The company is a key beneficiary of the ongoing vendor consolidation at the clients’ end.
Infosys, though lagging its peers, saw a pick-up on this front as the company recorded its highest volume growth since the September quarter of 3.8 per cent. The management reiterated its stand of continued challenges on the demand front, despite signing six large deals in the quarter.
| SIZING UP TECH TITANS | ||||||
| In Rs crore | TCS | Infosys | HCL Tech* | |||
| Q2'FY13 | FY13E | Q2'FY13 | FY13E | Q1'FY13 | FY13E | |
| Revenues | 15,621 | 63,268 | 9,858 | 39,174 | 6,091 | 24,214 |
| % chg QoQ | 5.1 | - | 2.5 | - | 2.9 | - |
| % chg YoY | 34.3 | 29.4 | 21.7 | 16.1 | 31.1 | 15.1 |
| EBITDA (%) | 28.4 | 29.3 | 29.1 | 29.5 | 22.2 | 19.5 |
| Bps chg QoQ | -71 | - | -151 | - | 20 | - |
| Bps chg YoY | -65 | -20 | -195 | -220 | 509 | 40 |
| Net profit | 3,512 | 14,022 | 2,369 | 9,094 | 885 | 3,098 |
| % chg QoQ | 7.1 | - | 3.5 | - | 3.6 | - |
| % chg YoY | 44.0 | 31.8 | 24.3 | 9.4 | 78.1 | 22.6 |
| * HCL Tech follows July-June calendar. Quarter-ended September is Q1 Source: Company, Analyst reports | ||||||
Pricing pressure was clearly evident for all the three companies in the quarter gone by. While TCS and HCL managed to hold on to their billing rates for the quarter, Infosys witnessed a fourth consequent quarter of pricing decline. Going forward, though, the companies' ability to keep billing rates intact could be tested, believe analysts. Unlike Infosys and HCL Tech, which admitted that discretionary spending continues to be under stress, TCS remained most positive on this front and indicated that discretionary spending is witnessing some growth.
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Non-core factors
Margins were a mixed bag this quarter. TCS witnessed a squeeze in its Ebitda margins, driven by a higher pie of on-site revenues due to the new project start-ups. The company's net employee additions also remained high at 10,531 people. While wage rises and higher subcontractor costs hit Infosys’ Ebitda margins, those of HCL inched up slightly, driven by higher utilisations and more offshore focus. HCL’s strategy of breaking up wage rises between the September and next quarter limited its impact on margins (to 80 basis points). However, management expects the December quarter margins to be hit by 100 basis points, due to the wage hike impact. Thus, sustenance of margin upsides remains key for HCL.
Non-operational factors were the key drivers behind the net profit beat recorded by both TCS and HCL. TCS witnessed a 77 per cent sequential jump in other income to Rs 310 crore (containing Rs 92 crore of forex gain) for the quarter, boosting bottom line growth. HCL posted lower-than-expected forex losses, while Infosys benefited from a 48 per cent growth in other income to Rs 706 crore.
New TCS CFO
TCS on Friday announced the appointment of Rajesh Gopinathan, vice-president, business finance, as the next chief financial offier. He has been appointed deputy CFO from on Friday.
S Mahalingam, CFO since 2003, will retire February 9, 2013, as he turns 65. He has been with the company for 20 years. Unlike the sudden announcement of the resignation of V Balakrishnan, CFO, Infosys, at TCS the process seemed smoother.
Gopinathan, 41, has been with TCS since 2001. He joined from the Tata Strategic Management Group. Gopinathan has worked to drive TCS’ newly established e-business unit in the United States, which has since scaled up into a significant business.
He was also involved in the design, structure and implementation of the new organizational structure and operating model of the company. He currently heads the Business Finance function responsible for financial management of the company’s operating units. He has held several positions in finance, strategy and sales during his career with the company and worked in multiple geographies. He is an MBA from IIM, Ahmedabad and an engineer from REC (Trichy). Born in 1971, Rajesh lives in Mumbai with his wife Lekshmi, daughter and son.