Strong execution, utilisation helps Infosys outshine TCS in Q1

Traction in new services a big trigger; gains on operational front depend on keeping costs control

Infosys beat Street expectations and outperformed its larger peer, Tata Consultancy Services (TCS), across parameters in the June quarter. While sales were down 0.2 per cent on a sequential basis to Rs 17,078 crore, it grew 2.7 per cent in constant currency terms, compared to 2 per cent growth by TCS. In dollar terms, growth was 3.2 per cent, with volumes and realisations contributing equally. 

The company said growth was broad-based across verticals. Utility, communication, consumer packaged goods and logistics led with 3-5 per cent growth. The biggest two verticals, financial services and manufacturing, account for 55 per cent of revenue. These grew 2 per cent each on a sequential basis. The company expects the financial vertical to improve in the second half of the financial year, on the back of higher interest rates (better economic activity) in the US and easing of regulatory worries. The company indicated digital services accounted for 23 per cent of revenue, compared to TCS’ 19 per cent.

The Infosys management highlighted that half the incremental revenue over the past two years had come from the new services and software businesses, launched in April 2015. This accounts for 9.9 per cent of revenue. Given the higher margins from this segment, the Street will closely look at incremental gains from businesses such as cloud, big data, analytics and the internet of things. 

The key takeaway continues to be the higher level of employee utilisation, including of trainees. The metric has been going up for six quarters and hit its highest ever level of 80 per cent. This is one reason why the margins at 24.1 per cent (flat year-on-year, 50 basis point fall over the March quarter) were steady despite the headwinds of rupee appreciation, ramp-up of high cost US workforce and salary hikes. This is better than TCS’ margins, which fell 170-240 basis points over the comparable periods, to 23.4 per cent in the June quarter. 

While the Infosys management indicated margin levers include a tighter control on onsite cost, zero bench projects and automation among others, analysts are not so hopeful of margin improvement. And, more so in the case of TCS, which has given a forecast of 26-28 per cent). Edelweiss analysts say TCS has sweated to the fullest all its margin levers of utilisation, such as onsite-offshore proportion and fixed price projects, despite which it could not offset currency volatility and wage hike pressures, leading to the 240 bps margin hit on a sequential basis. 

Infosys, however, indicated the September quarter will see a further one percentage point (100 bps) impact due to wage hikes. It has stuck to a 23-25 per cent margin band in FY18, while revenue growth is pegged at 6.5-8.5 per cent. 

While the information technology sector continues to face headwinds and will be an overhang for both (annual revenue growth similar), Infosys is better placed, given the better execution and sweating of assets. While Infosys’ shares closed 0.44 per cent down, TCS was down 1.85 per cent.