Q2 earnings reflect various approaches to push revenue growth of TCS, Infy

Different approaches to drive revenue growth have led to divergence in the second quarter earnings of India’s top two information technology (IT) services companies, Tata Consultancy Services (TCS) and Infosys. 

Though the leadership team of both IT firms flagged concerns about macroeconomic factors, apart from the demand slowdown seen in key business verticals such as financial services and retail, their confidence levels towards future growth seemed to have varied.

Industry experts were of the opinion that TCS’ focus on large IT outsourcing contracts might be one of the reasons behind the uneven distribution of quarterly revenues. In case of Infosys, its recent partnerships through joint ventures (JVs) and acquisitions started paying dividends to the company, experts said. “TCS, at a higher revenue base, is more focused on large deals and is investing more on products and solutions to clinch those deals. As large deals could be lumpy, earnings might see some blip in the short-term. On annualised  basis, however, the company would register sound growth,” said Pareekh Jain, founder of Pareekh Consulting. “In case of Infosys, inorganic growth from recent JVs and acquisitions was one of the major drivers of revenue growth,” he added.

Industry experts said that TCS, with an annual revenue of $20.9 billion in FY19 would have less space for manoeuvring as compared to Infosys, which ended the last financial year with $11.8 billion of revenue. “Small digital deals may not be able to move the needle for TCS, while for Infosys, such deals could push up its revenue growth with better margins,”  another IT outsourcing advisor said.

In the second quarter of the ongoing fiscal (Q2FY20), Infosys registered a revenue growth of 11.4 per cent in constant currency term, which was higher than TCS’ 8.4 per cent rise. During the quarter, Infosys’ growth was more broad-based than that of TCS.

“Organic growth for Infosys in constant currency term stood at 2.4 per cent quarter-on-quarter, which was higher than TCS. Infosys’ digital business also continued its strong growth momentum (as compared to TCS),” said brokerage firm Sharekhan in a note. It, however, noted that growth in banking, financial services and insurance (BFSI) remained weak for Infosys, excluding its contribution from Stater, the mortgage services unit of ABN AMRO Bank, which the company acquired in March this year. 

With regard to margin, optimisation moves of Infosys and its initiatives on automation helped the firm improve its profitability in Q2FY20. “Improvement in utilization by 180 basis points to 84.9 per cent (excluding trainees) and higher off shoring and other operational efficiencies (like automation) helped Infosys improve its margin,” said ICICI Securities in a note. In case of TCS, its operating margin declined 20 basis points sequentially to 24 per cent in Q2FY20, owing to cross currency impact apart from aggressive hiring in anticipation of future demand.

Analyst speak

•  TCS’ focus on large IT outsourcing contracts might be a reason behind uneven distribution of quarterly revenues
•  Infosys’ partnerships through JVs and acquisitions started paying dividends to the company
•  TCS, with an annual revenue of $20.9 bn in FY19, would have less space for manoeuvring, as compared to Infosys