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TCS, Infosys show may put jittery investors at ease

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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.




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