Robust revenue growth, increase in guidance make Infosys a bullish bet

India’s largest software services companies Infosys and TCS had similar third quarter results — strong revenue growth but weak profitability. 

However, what could lead investors to fancy Infosys as compared to its larger peer are robust revenue growth and increase in FY19 top line guidance to 8.5-9 per cent from 6-8 per cent earlier. 

Some of this bullishness is captured in the pre-market trades, with Infosys ADR trading at $10.2, up 3.24 per cent up on the New York Stock Exchange, while TCS stock was down 2.5 per cent on the BSE. 

The divergent stock trajectory could narrow the valuation gap between the two. At around 16 times, Infosys currently trades a sharp 20-21 per cent discount to TCS (at Thursday’s closing), which announced its Q3 numbers on Thursday. 

“Considering Infosys’ faster revenue growth in Q3 than TCS, a rise in revenue guidance by the former’s management, and lower valuation, we expect Infosys’ stock  to perform better,” says Sanjeev Hota, analyst at Sharekhan.

For Q3, Infosys reported 2.7 per cent sequential revenue growth in constant currency (CC) terms, outpacing a 1.8 per cent reported by TCS. 

Growth for both companies came across most of verticals and geographies. Even in the fast-growing digital segment, both companies reported 33-52 per cent rise year-on-year in digital revenue, in CC terms for Q3.

A strong deal pipeline, steady demand, and improvement in digital revenue, will all support revenue visibility of the two companies going ahead, according to analysts. Infosys reported deal wins of $1.57 billion in Q3 (over $4.7 billion in 9MFY19) and TCS reported $5.9 billion of deal wins in Q3, taking the total quantum of large deals to around $15.7 billion for 9MFY19.

However, revenue growth seems to be coming at the cost of margins. The IT giants witnessed 90-110 basis point sequential contraction in their operating profit margin. 

For Infosys, a one-time margin impact mainly came from the rise in depreciation (40 basis point impact). 

TCS’ Ebit (earnings before interest and tax) stood at 25.6 per cent, while it was 22.6 per cent for Infosys. While macro headwinds could derail growth, both managements are confident about demand in the near term, though they are cautious on margins.