IT's pain: TCS struggles to repeat past success, Infosys stares at lower score

The market's fears have turned out to be true: the top two listed IT companies, TCS and Infosys, have let down analysts with their performances.

TCS disappointed with weak numbers, while Infosys cut its guidance despite meeting the one set for this quarter. The market was expecting a sub-optimal performance from the companies and had hammered the stocks lower ahead of the results.

In order to get an idea of how the two companies compare in terms of their performances, we shall compare them on three key parameters:

1. Revenue growth: TCS disappointed with a weak 1% constant-currency revenue growth rate and a 0.3% growth in dollar terms. The company sharply missed analyst expectations on account of contract delays in India, delays in project ramp-ups in the retail segment and ramping up of projects. Kotak Securities says lack of easy share gains, portfolio challenges, high exposure to traditional services and lack of participation in early digital opportunities will mean that TCS will struggle to replicate the success of the past.

Infosys, on the other hand, has delivered marginally above market expectations with dollar revenue at $2,587 million as against an expectation of $2,562 million, and $2,501 million in the previous quarter. The company posted sequential growth of 3.1% in rupee terms and 3.9% in constant-currency term. Clearly, a much better performance at the revenue level by Infosys as compared to TCS.

2. Operating Margins: Despite a flattish revenue growth, TCS improved its margin by 95 basis points, displaying its inherent strength. CLSA says TCS could manage its robust margin on account of an offshore shift to grab revenue, lower variable pay and subcontractor replacement. With this, analysts expect TCS to maintain its margin around the 26-28% levels.

Infosys has also improved its margin to 24.9% as compared to market expectation of 24.4%, a growth of 80 basis points over previous quarter. M D Ranganath, CFO of the company, said: “Our margins expanded during the quarter on account of an improvement in the operational efficiency.” Vishal Sikka, the CEO, also reiterated that the company is likely to maintain its operating margins in the 24-25% range.

In short, both the companies have done well in maintaining their margins in tough times.

3. Guidance: Although TCS does not give guidance, analyst projections indicate that the company is expected to post modest growth. Kotak Securities says they do not see any immediate revival and expect the company to growt at 6.7% in FY18 and 9.1% in FY19. However, CLSA says Indian revenues will start contributing and the company can rebound to 20% growth in FY18.

Infosys, on the other hand, has reduced its guidance from 15-12% to 8-9% as discretionary spending visibility continues to remain poor. Considering the first half performance (second quarter is normally the strongest) and near-term uncertainties the company has lowered its guidance. Despite lower guidance, Sikka says he is sticking to the $20-billion revenue target for 2020.

In terms of sectoral movement, both the companies have felt the pressure from the BFSI (Banking, Finance, services and insurance) which are the top revenue contributors. Visibility and discretionary spending are clearly challenging issues for both the companies as Brexit fears are impacting clients in the BFSI space. The same will be true for the smaller Indian companies.