INSUBCONTINENT EXCLUSIVE:
ET Intelligence Group: The fourth quarter performance of Tata Consultancy Services (TCS) and Infosys, the country’s top software exporters
in that order, renders an optimistic demand scenario
This should offer some solace to investors amid challenges in the form of volatile currency market, intense competition, and rising pressure
on companies to increase hiring in the US market.
Each of the companies reported better growth in dollar-denominated revenue for FY19
compared with the previous fiscal
Infosys reported a 7.9 per cent growth compared with 7.2 per cent in FY18 and 7.4 per cent in FY17
In the case of TCS, a 9.6 per cent growth in FY19 was the highest in four fiscals
In addition, it posted better growth than Infosys for the second consecutive year at a much higher revenue base of $20.9 billion than the
latter’s $11.8 billion.
The growth momentum is expected to continue given that leading indicators such as client additions, scale of new
orders, and headcount additions look favourable
TCS and Infosys added one and two clients, respectively, in the $100-million and above billing segment in the March 2019 quarter
For the full fiscal, TCS added six and Infosys added five clients in this segment.
Each of the companies showed a sustained momentum in
earnings from digital solutions
TCS and Infosys earned 31 per cent and 33.8 per cent revenue from such services in the March 2019 quarter
In the corresponding quarter of the previous fiscal, each had earned over onefourth revenue from the digital platform
The rising share of these services is encouraging since it makes the offerings of Indian IT vendors relevant to clients’ demands.
The
employee base, too, increased significantly for both the companies
For TCS, the headcount expanded by 29,002 to 4.2 lakh, while Infosys reported net addition of 24,016 to the headcount at 2.3 lakh.
While the
revenue growth scenario looks positive, management of operating costs will be a major challenge, given volatile currency environment, rising
local hiring in the US, and higher subcontracting at a time when obtaining H1B visas is becoming tougher for Indian IT companies
This is reflected in the margin contraction for each of the two companies
However, TCS seems to have taken a lesser hit on profitability compared with Infosys
In the March 2018 quarter, its operating margin (EBIT margin) shrank by 50 basis points sequentially to 25.1 per cent, while Infosys
reported a 110-bps drop in the margin at 21.4 per cent.
In addition, Infosys has reduced the target margin band for FY20 to 21-23 per cent
from 22-24 per cent, which it had given for FY19 last year
The company has cited higher investment in digital platform as a major reason for the lower guidance.
Due to these factors, TCS is expected
to beat Infosys in terms of revenue growth as well as margin performance in FY20.
Barring the short-term market volatility amid ongoing
general elections, the stocks of these companies should reflect the difference in their performances in the coming quarters.
