The earnings season this financial year is expected to start on an exciting note, as two information technology (IT) behemoths — Infosys and Tata Consultancy Services (TCS) —report their first quarter numbers on the same day. By now, TCS is expected to report a better set of numbers than Infosys. Though Infosys has indicated a flat expectation for the quarter, April-June is typically the best for technology companies. This is likely to be reflected in TCS’ performance.
Be it in terms of revenue and volume growth or margin expansion, analysts expect TCS to beat Infosys on almost all counts in the first quarter of FY13. Though the benefits of a weaker domestic currency will reflect in its rupee revenues, Infosys’ dollar revenues are expected to stay flat sequentially, at $1.7 billion. TCS, on the other hand, is expected to clock a two per cent sequential growth in revenues to $2.7 billion.
ICICI Securities expects the top four companies in the sector to grow their dollar revenues by 1.2 per cent (constant currency growth of 2.5 per cent) during the quarter, versus four per cent and 3.8 per cent growth in Q1FY11 and Q1FY12, respectively. HSBC is estimating volume growth of 1.2 per cent quarter-on-quarter for Infosys and four per cent sequential volume growth for TCS.
This is largely factored into the stock prices of both companies. It’s for these reasons that TCS trades at a premium to Infosys. So, more than the first quarter performance, analysts believe there are a few things that the market will watch out for. This earnings season, pricing trends will need to be watched, as it lag any deceleration in volumes. Given that there’s much talk on the demand environment, this weakness could translate into pricing pressure in the coming quarters.
According to ICICI Securities, “With decision-making delays being followed by project push-outs and even some ramp-downs, pricing typically tends to be the next to fall. We expect most severe pressure within the BFSI (banking, financial services and insurance) segment.” This could spell trouble for players with high margins. However, players like HCL Tech and TCS are relatively better placed than peers, believe analysts, as their realisations are lower than that of peers. The blended pricing for Infosys has been more or less flat since Q1FY09, says Macquarie. In comparison, TCS’ blended pricing has dropped by 320 basis points in the corresponding time period.
Other than pricing trends, analysts also say the decision-making cycle and demand environment in the BFSI vertical is a must-watch factor. Given its 43 per cent exposure to the vertical, BFSI and its growth will impact TCS the most. Infosys derives 35 per cent of the total revenues from this vertical. Given that analysts have been saying this segment is still not fully out of the financial crisis of 2008, it’s a key piece to watch.