5 reasons why TCS will outperform Infosys in Q2

Market experts believe TCS to post better quarterly earnings vis-a-vis Infosys

Friday turned out to be a good day for Infosys as country’s second-biggest software exporter surprised the Street by raising the lower end of its revenue outlook for fiscal 2014.

Markets cheered the news with Infosys, the third most weighted stock on the BSE, rising 5 per cent to end at Rs 3,274 while Tata Consultancy Services (TCS), sixth in terms of Sensex weightage, touched a new high and closed at Rs 2,124.  

Infosys results have definitely calmed the market nerves in terms of growth outlook of the Bangalore-based tech giant. However, the prospects still looks better for TCS going ahead.

Here are the top 5 reasons:

Broad-based Growth: TCS has outperformed peers on revenue growth in last eight quarters despite being the biggest in size. In last eight quarters almost 70% of TCS’ verticals (BFSI, manufacturing, retail and life sciences) have grown faster than the company average (3.5% CAGR), which was not the case with other companies. According to Nitin Padmanabhan, an IT analyst at Espirito Santo Investment Bank Research, TCS stands to benefit as it has the highest exposure in this segment BFSI (43% of revenues).
 
Margin progression: TCS is expected to show improvement in the margins as well. Utilisation levels of Infosys showed an uptick of 77.8% in Q2 from 75.9% in Q1(excluding trainees) whereas the utilisation level of TCS reached a high of 82.7%, excluding trainees, in Q1 and is expected to post utilization levels of 82-73% in the second quarter results.

“Infosys has reported flat margins. On the other hand, TCS is obviously expected to post better margins,” said Dipen Shah, Senior Vice President at Kotak Securities, heading the Private Client Group Research.

Adds Rikesh Parikh, VP at Motilal Oswal Securities: “TCS has been better-off on the utilisation front so that will remain and Infosys is yet to catch up. The onsite revenue for TCS is high, which is a big positive.”

Aggressive Pricing:  TCS billing rates have fallen 6% in last five years compared with a 4% fall for Infosys and a 6% increase for Wipro. Given that weaker currency should result in higher margins, TCS will be keen to pass on the incremental benefits to clients as it has done before and is already sitting on industry leading margins.

 
Deal Pipeline: TCS, whose customers include Citigroup, BP PLC, and AstraZeneca PLC expects its deal pipeline to be strong for fiscal year 2014. Its main markets are the US (56% of FY13 revenue) and Europe (27%) which is showing signs of revival in growth.

Deal Pickup: Demand indicators in the US and discretionary spending across companies have improved overall. Meanwhile TCS has consistently beaten expectations and silenced critics on its ability to grow off a higher base, manage large increases in headcount and maintain margins. It has consistently been able to bag large deals in Q3 and Q4 thereby allowing it to report a strong start in any given financial year.