TCS missed street estimates again.
In the September quarter, the company reported a three per cent sequential growth in dollar revenues — lower than the consensus growth estimate of 3.7-3.9 per cent.
This was much lower than the strong 6 per cent growth of its rival Infosys in the quarter.
Growth across verticals — but for telecom, retail and healthcare – were more subdued relative to Infosys. In the BFSI segment, while TCS reported 3.9 per cent sequential growth, Infosys reported 5.2 per cent growth.
The management indicated that client mining was exceptionally good in the quarter that was reflected in the 4.9 per cent increase in volumes (vs. 3.7 per cent for Infosys), but in dollar terms, the reported growth was disappointing.
Revenue from North America grew 3.1 per cent for TCS while the growth was 6.1 per cent for Infosys.
The US market, which accounts for a chunk of the revenues of Indian IT players, is witnessing a steady slowdown in manufacturing activity. The PMI (manufacturing) index, which captures the factory level activity in US, stood at 53.1 in September, down from 55.7 in March. A stronger dollar, weaker demand from export markets and cut in capital spending by oil companies are becoming a challenge there. Weak growth of the manufacturing sector in the US will impact the fortunes of the players in the Indian IT space, unless these companies find ways to innovate and grow in the digital space, where demand is coming from the shift away from legacy systems.
In operational metrics, margins did improve for TCS. At 27.1 per cent, the operating margin was 80 basis points higher sequentially (70 basis points of this was from favourable currency movements). But unlike Infosys which showed a good improvement in utilisation, TCS saw a 0.3 percentage point drop in utilisation.
Client additionTCS has added three customers in the $100 million plus bucket, and said it has seen good order wins across verticals and geographies during the quarter.
But, since its revenue growth has been not up to expectations, and it has done poorly vis-à-vis Infosys for the second quarter in a row, the valuation gap between TCS and Infosys may narrow down further.
Infosys trades at about 19 times its likely earnings for FY16 — which is at nine per cent discount to TCS (21 times), down from 12-13 per cent earlier.
However, TCS is likely to continue enjoying premium valuation to Infosys given its track record of consistent growth and better margins.