After good results by HCL Tech last week and Tata Consultancy Services on Monday, the verdict is out that the underperformance reported by Infosys for the March quarter, coupled with its muted outlook for 2012-13 is not a secular trend. Most large information technology company stocks, which fell by four to 12 per cent in a day after the Infosys results on March 13, have thus regained lost ground. In fact, after the TCS results, its stock jumped almost 13 per cent (on Tuesday) while HCL Tech was up three per cent and Wipro by four per cent. Infosys continues to lag (up just 1.6 per cent).
Though the overall IT budgets of clients (in the US, Europe, etc) are witnessing flattish to negative growth this year, analysts believe the actual impact, as well as stock returns, will be company-specific. They say a company’s ability to generate consistent financial performance will depend largely on its swiftness in responding to the macro environment and changing client preferences. A case in point is that of TCS, Infosys and HCL Technologies, which witnessed divergent revenue growth trends (see table).
For TCS, this growth is likely to come from a pick-up in discretionary spending, coupled with demand from the BFSI (banking, financial services and insurance) and telecom segments. Though TCS does not provide guidance (expectations), its management said it expected to clock higher than the Nasscom-guided industry revenue growth of 11-14 per cent in FY13. HCL Tech is adopting an aggressive deal acquisition strategy and a higher focus on restructured deals (expected to go up 20 per cent in 2012). In contrast, Infosys continues to face project rampdowns and analysts believe its dollar revenue growth guidance of eight to 10 per cent for FY13 appears unachievable. In this backdrop, most analysts prefer TCS and HCL Tech and expect their stocks to deliver good returns.
BFSI future mixed BFSI, which accounts for 24 to 42 per cent of these IT biggies’ revenue, saw weak growth for all three. However, going ahead, the commentary on outlook is mixed. Infosys’ management didn’t sound positive on demand in this space — unlike TCS and HCL Tech, which expect this vertical to grow at a good pace in this financial year, thereby gaining market share.
Viju K George and Amit Sharma, analysts at JP Morgan, in a recent report on Infosys, say, “We believe in multi-vendor situations, particularly in BFSI. Infosys is losing market share. In ‘bread and butter’ offerings (such as application development and maintenance, infrastructure management, BPO), there is limited opportunity for differentiation. Hence, Infosys’ premium pricing disadvantage helps peers to eat into the company’s market share.
We believe players such as Cognizant, TCS and Accenture are growing partially at Infosys’ cost.”
Slowdown impact The outlook on hiring seems to have toned down a bit for all three, thanks to the overall demand slowdown. TCS, which added about 70,000 employees in FY12, is targeting to add 50,000 in FY13. Similarly, Infosys plans to add only 35,000 people in FY13 against a gross addition of 45,000 employees in FY12. Interestingly, while Infosys does not plan any pay rises in the near term, TCS has announced an eight per cent rise. This assumes significance, as it can push up employee-related issues such as attrition for Infosys. HCL Tech will announce its wage plans at the time of its annual results in June.
|MUTED TOP LINE GROWTH IN Q4|
|In Rs crore||TCS||Infosys||HCL Tech|
|Q-o-Q change (%)||0.4||31.0||-4.8||22.7||-0.6||5.9|
|Ebitda margin (%)||29.6||29.5||32.6||31.7||18.0||18.1|
|Q-o-Q change (bps)||-141||-43||-110||-90||-10||25|
|Q-o-Q change (%)||3.3||14.8||-2.4||21.9||5.3||6.6|
|March 2012 figures are on quarter-on-quarter basis All figures are consolidated HCL Tech follows June quarter as year end, TTM ended March quarter Source: Companies, Bloomberg|
Outlook, valuations Though the rupee’s appreciation and lower utilisation rates pulled down TCS and Infosys’ margins during the March quarter, lower operating expenses enabled HCL Tech to report flattish margins. Going forward, margins are expected to be under pressure for the three companies in the wake of wage rises, as well as rupee fluctuation, believe analysts.
Overall, volume growth, another reflection of the demand scenario, was good for both TCS and HCL Tech in the March quarter, given the weak macro environment; Infosys, though, witnessed decline in volumes. Given the outlook, this trend is likely to continue in the June quarter. All the three, however, believe pricing is likely to remain stable around current levels.
From a valuations perspective, most analysts are neutral on Infosys and expect its stock (at Rs 2,348; PE of 14.6 times estimated FY13 earnings per share) to be under pressure on employee as well as growth issues. For TCS, the views are mixed. Surendra Goyal and Rishi V Iyer of Citigroup note, “Valuations at 16 times (price Rs 1,059) one-year forward earnings have come off from recent highs but still at a reasonable premium to the sector – hence, we maintain ‘Neutral’.”
However, most analysts expect the TCS scrip to deliver gains of 18-20 per cent on a one-year horizon. They say TCS (PE of 18.7 based on FY13 estimated EPS) will continue to enjoy these premium valuations as long as it continues to deliver.
In the case of HCL Tech (PE of 14.1), strong revenue visibility and agility in responding to clients’ needs has turned most analysts bullish on the stock. They believe it can deliver 25-27 per cent returns over 12 months.