How TCS pipped Infosys as IT bellwether: 5 facts

Tata Consultancy Services, India's top IT outsourcer, surpassed Street estimates in the June quarter with strong earnings. The company’s management said it was confident of beating the upper end of the IT lobby Nasscom's FY13 revenue guidance in contrast to Infosys, which cut its sales outlook for FY13.

TCS shares rose the most in more than two months even as investors offloaded Infosys shares despite over 8 per cent cut on Thursday.

Infosys has been the bellwether of India's IT industry for long, but after a string of disappointing performances, the leadership mantle seems to have moved on to TCS.

Here's why:

1) Outlook: Infosys has been the industry bellwether because of its ability to achieve and usually exceed revenue forecasts. That kept analysts and investors happy. However, over the past few quarters, Infosys has been unable to keep pace with its forecast, and has repeatedly revised revenue growth lower. From a company that exceeded forecast, Infosys went on to cut its forecast more than expected. It cut its FY13 sales outlook to 5 per cent to $7.34 billion, down from its April estimate of 8-10 per cent growth. The company also stopped giving out quarterly guidance in view of the uncertain environment.

TCS said it expects to beat the industry export revenue growth forecast of 11-14 per cent for this fiscal year set by trade body Nasscom.

Tata Consultancy Services, India's top IT outsourcer, surpassed Street estimates in the June quarter with strong earnings. The company’s management said it was confident of beating the upper end of the IT lobby Nasscom's FY13 revenue guidance in contrast to Infosys, which cut its sales outlook for FY13.

TCS shares rose the most in more than two months even as investors offloaded Infosys shares despite over 8 per cent cut on Thursday.

Infosys has been the bellwether of India's IT industry for long, but after a string of disappointing performances, the leadership mantle seems to have moved on to TCS.

Here's why:

1) Outlook: Infosys has been the industry bellwether because of its ability to achieve and usually exceed revenue forecasts. That kept analysts and investors happy. However, over the past few quarters, Infosys has been unable to keep pace with its forecast, and has repeatedly revised revenue growth lower. From a company that exceeded forecast, Infosys went on to cut its forecast more than expected. It cut its FY13 sales outlook to 5 per cent to $7.34 billion, down from its April estimate of 8-10 per cent growth. The company also stopped giving out quarterly guidance in view of the uncertain environment.

TCS said it expects to beat the industry export revenue growth forecast of 11-14 per cent for this fiscal year set by trade body Nasscom.

"It makes you wonder if they are operating in the same environment because the management view of the two companies are completely different," Ambareesh Baliga, COO at Way2Wealth Brokers told NDTV Profit.

2) Earnings: While Infosys's June quarter net profit rose 33 per cent year-on-year as expected, TCS exceeded forecasts by posting a 38 per cent annual jump in quarterly profit. Infosys's billing rates were down 3.7 per cent from the previous quarter, compared with 1 per cent at TCS. Infosys margins declined by 200 basis points to 30.6 per cent against 36 basis point decline in TCS at 29.1 per cent in the June quarter. Infosys reported a sequential volume growth of 2.7 per cent against a robust growth of 5.3 per cent that TCS reported in the June quarter.

3) Management commentary: Infosys continued to underline weak macroeconomic environment, falling client confidence, and a drastic decline in discretionary spend as the reasons behind its falling fortunes. TCS, on the other hand, said future growth and demand will remain stable even as the unprecedented currency volatility continues to remain a challenge.

"Infosys is talking about an uncertain environment, clients not sure, budgets getting delayed, but if you look at TCS, they are saying clients are pretty aware, they have prepared the budget accordingly and they are spending their budget accordingly," Hardik Shah, analyst at KR Choksey Shares and Securities told Reuters.


4) Leadership: Infosys has come under fire from investors for what some said was an overly conservative approach that put it at a disadvantage to rivals. Infosys also held on to cash of $3.7 billion at the end of June, making some investors restless over its unwillingness to make a big acquisition or return some cash to shareholders.

CEO SD Shibulal told NDTV Profit that the company was looking for inorganic growth in certain areas - either in product and platform space or consulting and system integration or in Europe. However, there has been no urgency to move swiftly towards these stated goals.

5) Stock prices: Despite being over-valued, TCS shares continue their upward march as investors sell Infosys shares and shift allegiance to TCS. The company's stock price is trading near 52-week high levels. Infosys has not found buyers despite trading at an attractive price earnings multiple. Since July 2011, TCS share are up 12 per cent against 18 per cent fall in Infosys. The BSE Sensex has shed 7 per cent over the same period.

(With inputs from Reuters)