TCS steals a march over Infosys again

Consistently improving financials and better outlook have led analysts to up their earnings estimate for the company

It was not surprising to see the TCS stock jump over 5 per cent on Tuesday vis-à-vis the 1-2 per cent rise each in the broader markets and the Infosys share price, thanks to the strong set of numbers for the quarter ended December 2010. Post its excellent results, which the company announced on Monday evening (after market hours), brokerages have raised their 2011-12 EPS estimates for TCS by 5-6 per cent and the target price by 6-9 per cent, indicating a further upside from the current levels.

The better show by TCS’s stock adds to its outperformance vis-a-vis the broader markets since July 2010. The reason: TCS has been consistently leading the IT pack, both in terms of revenues as well as earnings growth, in the past few quarters, thus, building a strong case for re-rating of the stock. “In the last 3-4 quarters, TCS’s financial performance was better than Infosys’s, which drove valuation upgrades. TCS is now trading at a slight premium to Infosys. The current strength in the stock will be sustainable going forward,” says Rohit Kumar Anand of Pinc Research.

An optimistic stance on client budgets for 2011, a strong deal pipeline, confidence in maintaining margins and pricing are the key positives for the stock. Infosys, on the other hand, remains relatively cautious on the road ahead. Interestingly, the consensus EPS for TCS has been upgraded 33 per cent over the past five quarters. Analysts believe the continued outperformance by the company will provide good support to its stock.

Higher revenue visibility

For the quarter ended December 2010, TCS’s volume growth was nearly double that of Infosys (see table: Racing ahead) while its revenue and net profit growth were also visibly ahead of IT bellwether Infosys (see table). While the improving business environment in key markets like the US has helped TCS deliver a robust volume growth, better employee productivity helped post a stronger bottom line growth. Infosys scored on the pricing front though, wherein it saw a 160 basis points expansion against TCS’s 118 basis points.

While TCS’s employee utilisation (excluding trainees) was firm at 83.8 per cent, that of Infosys shrunk to 80.7 per cent from 81.2 per cent in the September 2010 quarter. TCS also witnessed broad-based growth across all verticals except telecom which declined marginally (0.5 per cent). Increased off-shoring and a preference for integrated players are the trends helping players like TCS, which bagged nine large deals in the December quarter.

Going ahead, the higher employee addition by TCS reflects its confidence about a robust volume growth, which should be ahead of the industry and its closest peer Infosys, say analysts. TCS posted record net additions of 12,497 employees in the December quarter, a growth of 7.2 per cent on a sequential basis. It has revised the hiring guidance to 62,000-65,000 for FY11 (versus 50,000 earlier) and expects to hire 12,000-15,000 people in the current quarter. In comparison, Infosys added 5,311 employees in the December quarter, clocking a growth of 4.3 per cent over the September quarter and is targeting 5,900 gross additions in the current quarter.
 

RACING AHEAD
In Rs  crore	Infosys	TCS
Sales	7,106	9,663
% growth q-o-q	2.30	4.10
Ebitda (%)	30.21	30.00
Net profit	1,780	2,330
% growth q-o-q	2.50	10.60
EPS (Rs )	31.10	11.90
Vol growth (%)
Q3'10	6.10	6.60
Q4'10	5.20	4.00
Q1'11	7.60	8.10
Q2'11	7.20	11.20
Q3'11	3.10	5.70
Financial figures are consolidated, and for Dec 2010 quarter Source: Companies

Widening profit gap
India’s largest IT company TCS also continues to widen the revenue and profit gap with Infosys, which stood at 36 per cent and 31 per cent respectively — the highest in over 8 quarters. A higher volume growth coupled with pricing gains and improving efficiency is aiding TCS’s performance. This has also helped the company level up with Infosys on the Ebitda margin front, with margins of 30 per cent versus 30.2 per cent for Infosys.

Though currency movements impacted TCS’s margins negatively by 112 basis points in the December 2010 quarter, these were offset by gains on the pricing and SG&A (selling, general and administration) front along with offshore leverage. Pricing gains were led by renewals at higher rates and changes in the service mix.

The improving performance has helped TCS command a premium valuation vis-a-vis Infosys since October 2010. As per Bloomberg estimates, TCS now trades at a price to earnings (PE) of 23 times its 2011-12 earnings versus 22 times commanded by Infosys. Meanwhile, at Rs 1,196, there is upside given that analysts have put price targets ranging Rs 1,300-Rs 1,400.