IT: Differing track

TCS growth outlook more robust than Infosys.

As far as just numbers go, Tata Consultancy Services (TCS) numbers for the September 2007 quarter might seem less impressive than those of Infosys.

While Infosys posted an increase in operating profit margin (OPM) of 257 basis points q-o-q, the rise in TCS' margin was 80 basis points at 26.3 per cent.

Both grew their top lines by similar amounts -8 per cent-plus q-o-q, but Infosys appears to have managed a 190 basis points increase in prices, whereas TCS has managed a 90 basis points increase.

Where TCS has scored over Infosys, however, is in its outlook. With net additions to its headcount of 9,300 in the September quarter and gross additions of 12,000-plus, much better than the guidance, TCS is signalling a stronger growth in the days to come.

While Infosys may have hired more had its Mysore facilities been ready, TCS appears to be more confident and is investing in future growth. What's more it has 20 deals of $50 million-plus in the pipeline, which indicates that it is able to bag big orders.

The fact that horizontals such as consulting, which fetch superior margins"" are contributing more to the business is a good sign.

In the September quarter, TCS' margins improved owing to an increase in offshore component of revenues to 43 per cent, a rise of 190 basis points, as also an increase in the fixed price contracts, which were up 100 basis points at 43.7 per cent.

The attrition at 11.5 per cent was not alarming though the utilisation at 73.74 per cent, including trainees, was a bit of a disappointment. Nonetheless, TCS seems to be winning more large deals and appears to have better visibility.

It has also been able to pull off volume growth and grown verticals such as BFSI where there was some concern. At the current price of Rs 1,075, the stock trades at about 20 times estimated FY08 earnings and 17 times FY09 earnings and should outperform.

Infosys, on the other hand, seems a tad expensive at the current price of Rs 1,929 which values the stock at 24 times FY08 estimated earnings.

Axis Bank: Outperformer

Axis Bank (earlier UTI Bank) has had a quarter of excellent performance, beating analysts' expectations. On a net interest income growth of 73 per cent y-o-y to Rs 588.7 crore in the September 2007 quarter, its operating profit has gone up a huge 85 per cent.

The growth in operating income was aided by an increase of 87 per cent in other income. Trading income went up 339 per cent, while fee income increased an impressive 69 per cent.

For Axis Bank, the September quarter has been much better than the June quarter. During Q1 FY08, its operating expenses went up 76 per cent, which resulted in its operating profit growing 30 per cent.

In Q2, the bank has done better despite operating expenses rising 77 per cent. Besides this higher net interest income, its average cost of funds declined 25 basis points to 6.18 per cent sequentially.

During the quarter, it raised over Rs 4,500 crore through GDR, preferential and QIP issues. This helped the bank retire some of its high-cost debt.

As a result, net interest margin went up 56 basis points to 3.28 on a q-o-q basis and 36 basis points on a y-o-y basis, after adjusting for the amortisation of premium for held-to-maturity investments.

Net advances went up 54 per cent y-o-y, with a slower growth in retail advances at 27 per cent. The bank's retail assets have come down by 500 basis points y-o-y to 24 per cent of total advances, which is a positive sign.

The increase in advances was aided by a deposit growth of 49 per cent. The contribution of low-cost deposits increased to 45 per cent of total deposits in Q2 from 40 per cent a year ago.

After the dilution, its capital adequacy ratio has gone up to a healthy 17.59 per cent. The Axis Bank stock went up 10 per cent after its results on Tuesday and has appreciated over 45 per cent in the past two months. Trading at 3.7 times estimated FY09 book value, Axis Bank appears expensive.