TCS, HCL Tech lift IT gloom

Unlike Infy, both firms meet Street expectations and say FY14 will be a better year

In stark contrast with the dismal numbers Infosys reported last week, Tata Consultancy Services (TCS) and HCL Technologies on Wednesday lived up to the Street's expectations for the quarter ended March 2013 on both revenue and profit growth parameters.

Even as Infosys continues to face headwinds, TCS and HCL are confident of delivering better growth in FY14. TCS said it expected to grow at a rate better than industry body Nasscom's FY14 estimate of 12-14 per cent.

For the quarter ended March, TCS reported net profit of Rs 3,597 crore, a 22.1 per cent growth over the corresponding quarter of the previous year and a 1.3 per cent increase on a quarter-on-quarter basis.

HCL Technologies, on the other hand, posted a 72.6 per cent jump in net profit for the quarter. Net profit rose to Rs 1,039.9 crore, from Rs 602.5 crore in the same period last year. The company follows a July-June financial year. The revenues of the country's fourth-largest software services firm stood at Rs 6,424.6 crore during the quarter, up 23.2 per cent from Rs 5,215.6 crore in the year-ago period.

Strong traction in the infrastructure management services (IMS) vertical and higher forex gains enabled HCL Technologies to deliver stronger growth on all counts versus its larger peers. TCS was a close second, with volume growth of 4.4 per cent and better-than-expected profit margins. Infosys, on the other hand, has continued to struggle and is unlikely to turn around soon, say analysts.

Ankur Rudra, IT analyst at Ambit Capital, says: "The performance of TCS and HCL Tech is strong, given that the March quarter is a seasonally weak one for the sector. Both these companies continue to gain market share from their peers. On the other hand, Infosys' prospects will improve with a pick-up in discretionary spending."

While HCL Tech and TCS are the top picks of most analysts in the IT sector, the high valuations are likely to cap significant upsides for these stocks going forward.

For the March 2013 quarter, while TCS and HCL Tech posted revenue growth of over two per cent sequentially, Infosys' remained almost flat (see table). The IMS vertical drove HCL's top line, while TCS witnessed double-digit growth rate across all verticals. Though the new client addition remained robust for all of these companies, increased client mining enabled HCL and TCS to outperform Infosys. Notably, Infosys' organic business remains under pressure and the Street will await sustained performance by the company before re-rating its stock.

As far as margins are concerned, higher focus on non-linear growth, coupled with improved utilisations, enabled HCL Tech to curb the decline in Ebitda margins. The margin drop was just 20 bps - much better than Street expectations. TCS' margins were hit by a one-time employee settlement payment, but these were, again, better than estimates. The firm curtailed margin compression to 60 bps (against expectations of a 100-bp drop) due to low attrition, as well as its ability to sustain high utilisation rate (excluding trainees) of over 80 per cent. Infosys' margins were hit by muted topline growth, onsite wage hikes and Lodestone integration. The fact that Infosys discontinued its earnings-per-share guidance also indicated the underlying management caution.