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Bangalore based IT services firm Infosys may have set the tone for the better story for the IT industry, but thes country's largest IT services firm Tata Consultancy Services (TCS) have taken the growth story to another level.
TCS not only continued its strong run, but also belied consensus estimates on earnings as well as revenue growth for the quarter ended June 30, 2013. Strong volume growth of 6.10% surprised the street which was building in about 4% sequential volume growth (versus 4.1% for Infosys) for the quarter.
This led the revenue growth of 9.5% sequentially to Rs 17,987 crore. The higher volume growth is commendable given the subdued macro environment for the sector. TCS' net profit growth too came in at a robust 6% as against a marginal slip in Infosys' profit.
While Infosys had managed to beat the already muted expectations when it announced its results last week, TCS performance is much superior than Infosys on all fronts. They key difference between both the companies lies in the management tone. While Infosys management remains cautious about the future outlook (despite some signs of pick up in discretionary spending), TCS management appears full of confidence. TCS has been delivering a broad-based all round growth consistently thanks to its well-diversified business model. Thus, the valuation gap between the two is likely to sustain going forward.
"TCS has reported yet another solid quarter. The sector scorecard is so far 2/2 on revenue performance with both Infosys and TCS delivering good numbers. TCS' start to the year (already at 16%YY) as well as commentary suggests much greater confidence on growth going ahead. A weak currency is also providing solid buffer to margins and overall on the core operating front, TCS looks well placed," said Nimish Joshi of CLSA in his note.
Notably, the TCS stock has made new highs in each of the past two trading sessions and hence analysts believe significant upsides in the scrip remain capped. The TCS scrip trades at 19.2 times FY14 estimated earnings while the metric stands at 16.3 times for Infosys. Despite attractive valuations, analysts believe Infosys needs to deliver consistent performance over the next few quarters to warrant a strong re-rating.
Ankita Somani, IT analyst at Angel Broking says, "Strong show by TCS indicated that its premium valuations over Infosys are justified and here to stay. Contrary to its peers, the TCS management does not sound cautious at all. Even after being the largest company, they are still growing better than their peers." After today's strong show, analysts could revise their FY14 estimates for TCS marginally.
On the macro front though, stricter visa norms by US and other countries could spoil TCS' party. It would hit the IT companies revenues as well as profitability significantly. Infosys may look at buying out a US- based company to reduce the impact of stricter visa norms. TCS' strategy on this front will be keenly watched.
However, analyst were also confident that the company would be able to handle the immigration bill impact well. "TCS' management remains 'very positive' in its outlook for the rest of the year and maintains that FY14 revenue growth will pick up over FY13. US immigration overhang remains the key concern for the company, but the management expects that it will be able to handle any changes to immigration rules without resorting to extreme measures," said Divya Nagarajan of UBS Securities Asia in her note.
N Chandrasekaran, CEO and MD of TCS, "Discretionary spends in the US are much better than Europe. We are extremly well positioned. We look forward to an exciting year. We see a good pipeline and demand for the next few quarters. We maintain that we will do better than the Nasscom guidance growth of 12-14% for FY14."
S D Shibulal, CEO, Infosys: "the challenge is volatality in our performance. One quarter cannot be seen as a secular trend."