This Article is From Oct 16, 2013

Why TCS can sustain its premium over Infosys

Why TCS can sustain its premium over Infosys
Tata Consultancy Services wowed the Street again after it beat earnings estimates in the September quarter. India's second biggest outsourcer outperformed its rival Infosys across parameters that matter the most and cemented its position as the bellwether of India's over $100 billion IT industry. TCS shares are expected to rise on Thursday, when markets open next. The stock has been trading near an all-time high and Q2 earnings are likely to trigger further upsides, brokers say.

Here's why TCS may continue to trade at a premium over Infosys

  1. Strong growth: IT companies have witnessed pressure on pricing because global markets, which account for a bulk of their revenues, are still struggling to grow. To overcome pricing challenges, IT firms need growth momentum and that's exactly what TCS has done. In the three months to September, TCS reported a volume growth of 7.3 per cent, which is a nine-quarter high. Strong volumes helped TCS report a 5.4 per cent sequential jump in US dollar sales. In contrast, Infosys volumes rose 3.1 per cent sequentially, slightly lower than the June quarter, despite the company's renewed focus on "bread and butter" outsourcing contracts. Infosys posted 3.8 per cent rise in dollar revenues.

  2. Superior margins: A little over two years back, Infosys was investors' favourite for being the company that "under promised and over delivered". Infosys' margins were constantly over 30 per cent, which means for every one rupee of revenue, the company earned over 30 paise (before interest and taxes). Over the last few quarters, Infosys has constantly failed to deliver on the margin front, while TCS has surprised the Street, despite its large base. For the September quarter, TCS delivered an operating margin of 30.2 per cent as against Infosys' 21.9 per cent. Further, TCS expects margins to be in the range of 26-28 per cent, while Infosys CFO Rajiv Bansal expects margins to be in the range of 23.5 per cent (+/- 1 per cent) for this fiscal.

  3. Strong visibility: TCS does not give an annual revenue forecast, but expects to grow faster than the industry average of 12-14 per cent this financial year. In fact, TCS chief executive on Tuesday said that the company's growth this year will be better than last year. Compare that to Infosys, which said it will grow at 9-10 per cent after narrowing its annual revenue guidance forecast last week. Analysts have pointed that the Infosys is being "conservative" about growth estimates, but chief executive SD Shibulal maintained that "guidance is a statement of fact".

  4. Employee morale: Infosys continues to be dogged by high attrition (reduction in manpower), which in the September quarter stood at 17.3 per cent as against 10.9 per cent for TCS. Besides, TCS has been constantly clocking utilization rates (billing efficiency) of over 80 per cent (excluding trainees utilisation for TCS was 83.4 per cent in the September quarter), and though Infosys has managed to increase its efficiency, its utilisation for the same quarter lagged at 77.8 per cent.

  5. Valuations: TCS trades at 24-times FY14 price earnings estimates making it costlier than Infosys, which traded at 18.5-times FY14 price earnings (Bloomberg estimates), but the strong growth may continue to propel TCS shares ahead. Earlier this month, global investment bank Nomura upgraded TCS to "buy" citing revenue upside, margin comfort and reasonable valuations.