TCS' growth along estimates, outlook stable

Against Infosys? bearish commentary, TCS and HCL Tech reaffirm their positive outlook

December quarter results of three IT biggies — TCS, Infosys and HCL Technologies —broadly met the Street expectations. However, divergent commentaries from the managements indicated that the demand issues would probably be more company-specific than industrywide.

Commenting after HCL and TCS results, Partha Iyengar, vice-president, distinguished analyst and regional research director, Gartner, says: “The results reinforce the message that the overall health of the global sourcing industry is strong. Individual company performance will be driven by management vision and ability to drive an aggressive market stance. This year will see a widening gap between companies with a ‘can do’ and ‘can’t do’ management style in the offshore space, and will likely see a new order emerge.”

Both TCS and HCL reported good sets of numbers on Tuesday. While their peer Infosys pruned its 2011-12 revenue guidance, citing delayed decision making by clients, TCS maintained that budgets could remain flattish for the year. On the other hand, HCL is witnessing increased traction from vendor consolidation by clients, despite slowdown in the overall market growth.
 

INFOSYS VS TCS December quarter performance
	TCS	Infosys
Sales	13,204	9,298
Growth	13.50%	14.80%
Ebit	29.20%	31.20%
Bps chg	210	302
Net profit	2,887	2,372
Growth	18.37%	24.50%
Sales and net profit in Rs crore; sales and net profit growth on a sequential basis; EBIT: Earnings before interest and tax; All figures are consolidated and for the December 2011 quarter; As per IFRS standard                                                  Source: Companies

Beaten down expectations
For the December quarter, volumes for both TCS and Infosys were lower than expectations, indicating weakness in the decision making process. A weaker rupee boosted the price realisations for both the companies, offsetting the impact of seasonally lower volume growth. While Infosys recorded pricing gains of 80 basis points in constant currency terms, TCS’ rose by around two per cent (200 basis points) on a sequential basis. TCS’ management expects pricing to remain stable going forward. HCL, too, said pricing was largely stable.

While rupee fall propped up Ebit margins, cost rationalisations also helped. However, a weaker rupee impacted companies, as it led to forex losses on hedged positions. TCS was hit more than its peers, and booked a higher-than-expected forex loss of Rs 300 crore in the quarter, given its large hedged position. Infosys, on the other hand, benefitted from its strategy of short-term hedging. Going ahead, a stronger rupee would make sustaining these margins difficult, believe analysts.

Mixed outlook
While Infosys trimmed its FY12 revenue guidance from 17.1-19.1 per cent to 16.4 per cent, TCS remained reasonably confident for the coming quarters, as more than 80 per cent of its clients finalised their budgets. Both the companies, however, maintained their robust hiring targets for the financial year (TCS 60,000 and Infosys 45,000). Notably, lower IT spends in discretionary space will have a higher impact on Infosys and HCL; while TCS, which gets less revenues from discretionary segment, is better placed.

While Infosys bagged five large deals in the December quarter, the number for TCS stood at 10. Though TCS management remains confident of deal ramp-ups, Infosys is seeing a slowdown in that.

Most brokerages remain bullish on TCS (and HCL) given better visibility, partly reflected in the higher valuations that TCS enjoys. TCS is currently trading at 20 times its 2011-12 earnings, compared to 18 times for Infosys. Analysts expect these premium valuations to continue going forward.

Citigroup’s Surendra Goyal wrote in a recent report: “With demand trends weak and the sector being a big beneficiary of rupee depreciation, we see no reason to rush into Infosys.”