Infosys could catch up in the second half of this financial year.
India’s top software company, Tata Consultancy Services (TCS), beat the Street’s estimates for the June quarter, thanks to a handsome 7.4 per cent volume growth quarter-on-quarter (q-o-q). The stock, which fell over 2 per cent in Thursday’s trading session, has the potential to deliver 20-25 per cent returns from these levels over a one-year horizon, believe analysts. Another round of minor upgrades for earnings estimates cannot be ruled out for the company, which has now become the bellwether for the sector as Infosys continues to underperform on muted expectations.
For Infosys, emphasis on execution, completion of reorganisation, ramp-up from new deals and market share gains would lead to a much needed ‘catch-up’ starting 2QFY12E. Says Shashi Bhusan, IT analyst at Prabhudas Lilladher, “Stronger volume growth has helped TCS deliver results above expectations. TCS will continue to trade at a premium of 7-8 per cent versus Infosys. We believe Infosys will catch up in the second half of this financial year and deliver good growth.”
| MARGIN PRESSURES | ||
| In Rs crore | TCS | Infosys |
| Sales | 10,797 | 7,485 |
| % change* | 6.3 | 3.2 |
| Ebit (%) | 26.1 | 26.1 |
| Change (bps)* | -213 | -291 |
| Net profit | 2,380 | 1,722 |
| % change* |
NC | |
All figures are consolidated for the June 2011 quarter
Source: Companies
As against the “cautiously optimistic” view of the Infosys management on future growth, TCS continues to be bullish and expects demand to remain steady despite uncertainty in the global macro environment. Though TCS expects margins to improve from here on, Infosys has guided for a fall of 250 basis points (bps) for the year. The hiring guidance for both companies continues to be robust, indicating steady demand. Infosys expects to hire 45,000 people this year, while TCS has a target of 60,000 people.
While a strong deal pipeline has enabled TCS to post robust volume growth, that for Infosys was lower (hit by a fall in telecom and top client revenues). TCS is seeing traction across verticals, including the telecom vertical, while Infosys continues to underperform(down 7.1 per cent q-o-q in the June quarter).
Stable pricing for the June quarter, along with higher top line growth, cushioned TCS’s operating margin fall to 213 bps q-o-q. Infosys, on the other hand witnessed a 291 bps contraction in its Ebit margin for the quarter gone by, led by a per cent fall in constant currency terms. This fall is an indication that Infosys may be looking at a lower pricing premium versus peers for deal wins.
Further, wage increases hit both the companies this quarter. TCS continued to close in on Infosys’ Ebidta margins. A redeeming point for Infosys is that analysts expect a 130-170 bps contraction in its full-year margins (lower than what the company has guided). This optimism comes on the back of multiple levers such as utilisation rates.
For Infosys, much of the growth will be back-ended, with a major thrust on the September quarter results (a traditionally strong quarter), believe analysts. Nimish Joshi, IT analyst at CLSA, wrote in a note that Infosys needed to outperform in the September quarter to just meet the FY12 expectations, and was a riskier bet. With the FY12 revenue growth outlook staying unchanged at 18-20 per cent y-o-y growth, the firm believes there is a downside risk to the Street’s FY12 EPS numbers.
While revenues from the US markets continued to grow for both the tech giants, those from Europe are taking a hit. While TCS witnessed good growth across its client base, Infosys witnessed another quarter of a fall in top client (BT)’s revenues. Utlilisation, including trainees, was down for TCS while that for Infosys saw some uptick. Among the verticals, BFSI and retail were the growth drivers for both players.
