COMMENT. Infosys betters TCS for third straight quarter

Infosys’ scorecard was better than that of TCS for a third straight quarter. The sequential dollar revenue growth in the December quarter was 0.6 per cent against TCS’ negative 0.3 per cent.

Market expected Infosys to report a 0.8 per cent decline in dollar revenues.

Volume growth was at an impressive 3.1 per cent (versus. 3.7 per cent in the September quarter), given that the October-December period is a seasonally weak quarter.

Higher revenues from Europe (3.9 per cent increase) and improved traction in financial services and the energy verticals that together account for 53 per cent of revenues, helped. The financial services and insurance segment grew by 3.1 per cent sequentially in constant currency terms against a muted 0.7 per cent growth for TCS. Similarly, in the energy vertical where TCS reported a 1.6 per cent growth, Infosys saw a stronger 4.6 per cent growth. The acquisition of Noah Consulting in October that helps upstream oil and gas companies in information management buttressed growth.

There were four large deal wins during the quarter with a Total Contract Value of $360 million. It added 75 new clients. Revenue from top five clients was at 13.9 per cent, up from 13.3 per cent in the same quarter last year indicating better client mining.

Infosys has over 60 per cent of its revenue coming from America. In the December quarter, the company recorded a 0.5 per cent sequential drop in revenues (in constant currency) from this geography. Though, this may be partly due to the impact of fewer working days in the US in the December quarter, some loss due to a slowdown in the manufacturing space in the US can’t be ruled out. In the December quarter last year, the company saw a 2.3 per cent growth in the North American market in constant currency terms.

The US manufacturing sector has been contracting since November with businesses hurt by stronger dollar. In the coming quarters, there may be more weakness in revenue from the US as the manufacturing slowdown gets reflected in top-line numbers of IT service vendors only with a lag effect. Going ahead unless companies add new clients and increase digital business, growth from the US market may be muted.

TCS did a relatively better job as far as the American market is concerned.

In the December quarter, the company recorded a 1.4 per cent growth in the North American market. This could also be because of a lower base- 3.4 per cent growth in September quarter, vis-à-vis, 6.2 per cent for Infosys.

Despite lower price realisations (drop by 2.5 per cent sequentially), Infosys was able to keep margin contraction at just 60 basis points in the December quarter (to 24.9 per cent). This was thanks to benefits from a weaker rupee and good volume growth. Increased adoption of automation which it was able to free up about 1100 employees in the quarter also helped. Utilisation dropped marginally during the quarter and the onsite-offsite mix was not changed much.

The IT industry has been facing headwinds on realisation front for more than 12-15 months with increased competition seeing vendors cut prices.

But Infosys is well set to pull up the automation and innovation levers to address pricing pressures in the coming quarters. The company has indicated that it will also try to improve utilisation levels further and bring a better onsite effort mix in the infrastructure services.

The management has indicated that operating margins may continue to be around 25-26 per cent in the coming quarters.

As a reward for the good job Infosys has done in the last three quarters, its stock has moved to a premium to TCS’. Infosys trades at about 19.7 times its likely earnings for FY16 while TCS trades at 18.7 times.

At one point, Infosys’ stock was trading at bout 12-13 per cent discount to TCS’.

Several lead indicators — client mining, declining attrition and improving utilisation — are pointing to better prospects for Infosys going ahead.