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MUMBAI : Fourth-quarter results from the top two Indian IT companies have produced contrasting investor responses.
Tata Consultancy Services (TCS) surged the day after the company said it was back on course to double-digit growth and high margins.
Infosys slumped the next trading day after forecasting lower margins, disappointing the street with its below-industry-growth guidance.
TCS posted its biggest singleday gain since April 2012 on Friday, closing at Rs 3,412 on the Bombay Stock Exchange, up 7 per cent, for a market cap of $98.9 billion after hitting an intraday record of Rs 3,421.25.
Infosys, which reported earnings on April 13, fell 3 per cent on April 16.
The stock has since risen, getting a lift as the broader IT sector has been boosted by a weak rupee.
Analysts said the fortunes of the two companies are split by their growth and margin prospects.
“The TCS management remained optimistic for double-digit revenue growth in FY2019 on the back of healthy deal wins and deal closures in recent past, strong deal pipelines, traction for its digital offerings and anticipation of cross-currency tailwinds,” analysts at Sharekhan said in a note.
The brokerage said it was even more bullish than before on the company following the results and expects revenue growth to accelerate.
Other analysts concurred.
“TCS delivered 6.7 per cent constant currency revenue growth for FY18 (8.6 per cent USD revenue growth for FY18).
This is better than Infosys which delivered 5.8 per cent YoY constant currency growth in FY18,” wrote Madhu Babu, equity analyst at brokerage Prabhudas Lilladher in a note.
Trading at Par with Accenture“Led by solid 4Q revenue beat, we expect TCS to deliver 11.3 per cent USD revenue growth for FY19E (vs 9.5 per cent growth modelled earlier).
This marks an uptick in revenue trajectory,” wrote Babu.
TCS is currently trading at par with Accenture on the valuation front against an 18 per cent discount three months ago, he said, adding the upward revenue trajectory was encouraging.
Analysts mostly had the opposite take on Infosys.
“We believe the $2 billion additional return of capital in FY19 will cushion an otherwise tepid earnings growth even as buyback cannot happen before December 2018,” brokerage Nomura said in a note.
“We believe street estimates are at risk, as they build in material growth acceleration and flat-to-improving margins.”
Infosys has forecast 6-8 per cent growth in constant currency in FY19, which at the lower end will fall below the industry growth rate expectation of 7-9 per cent issued by the National Association of Software and Services Companies (Nasscom).
TCS does not give growth forecasts, but the company has closed well over $6 billion of deals in FY18, which will boost its growth.
Infosys closed over $3 billion of deals in the year.
One quarter into his tenure, Infosys CEO Salil Parekh seems to have had a hard landing.
Predecessor Vishal Sikka had tried to wrest back the IT bellwether tag from its larger rival but was unable to do so.
Infosys is now expected to lag in revenue growth and profitability for the next few years unless Parekh can pull off a turnaround, analysts said.
Infosys said it would give up some of its margins to invest for growth, while TCS CEO Rajesh Gopinathan said that higher future growth would boost margins.
To this end, Infosys reduced its margin target to 22-24 per cent from 23-25 per cent.
TCS has held on to its “aspirational” target band of 26-28 per cent, even though it ended the year under that band.
“You have to understand that the lower margin came at a time when we have grown at the slowest in several years,” Gopinathan said in a post-earnings conference call with analysts.
“Slow growth does affect the margin.
But we think we are on the right trajectory for higher growth, and we are gaining traction in digital.
This will help the margin.”
Analysts also pointed out the stark contrast in the commentary on the prospect for new digital business.
“If you heard Parekh, he talked about investing to stay relevant to clients, about how large clients are not necessarily working with Infosys on digital.
“It is almost as though he thinks the company is not prepared,” an analyst at a Mumbai brokerage said.
“He said it was a three-year transformation.
Gopinathan was clear that the company has invested and is seeing the benefits of it.”
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