TCS: Low revenue stream

Sluggish growth in US sales has impacted December quarter revenue numbers

Revenues of Tata Consultancy Services (in dollar terms) for the December 2007 quarter were somewhat disappointing at 6.2 per cent q-o-q, mainly because of sluggish growth in its US sales. That's one reason why the stock lost 2.3 per cent on Thursday.

Infosys' revenues in the quarter too have grown at 6.1 per cent q-o-q. But, while the volume growth for TCS was 5.3 per cent, for Infosys it was a very poor 4.5 per cent. On the margin front, Infosys continues to do better. The operating profit margin for TCS was up just 37 basis points q-o-q at 26.7 per cent; for Infosys it was up 132 basis points at 32.6 per cent.

Infosys has benefited from lower sales and marketing expenses, which fell because of lower sales bonuses compared with the second quarter of FY08. That's possibly why the Infosys stock at Rs 1491 is close to its 52-week low.

The difficult operating environment could pose some problems for all technology firms in the months ahead. As such, the TCS management remains cautious though there is no clear evidence that demand is falling. Among the top three IT firms, TCS earns the least "" less than half of its revenues "" from the US and is therefore relatively better off than the others.

Also, the deal flow at TCS has been particularly strong "" the company announced seven $50 million-plus deals, including the $1.2 billion deal from Nielsen Company.

While TCS hired 8,000 people during the quarter, lower than 9,000 indicated, it has nonetheless said that it will recruit 32,500 people by the year-end as it had guided. On the other hand, Infosys has increased its hiring target for FY08 by 1,000 employees.

At Rs 923, TCS trades at 15 times estimated FY09 earnings while Infosys at Rs 1491 trades at just under 16 times estimated FY09 earnings.

While the valuation gap between the two has been narrowing with Infosys underperforming TCS in the last three months, the gap has never been so small. However, given the slowdown in the US and the possibility of further rupee appreciation, both stocks may continue to languish for some more time.