Confirmed: TCS thrives, pips Infosys as IT bellwether

India's largest tech companies Infosys and TCS declared their first quarter results on Thursday, with the former reporting lower-than expected earnings and the latter beating estimates, thereby confirming its status as the IT belwether.

Infosys said it expects a 5 percent revenue growth in the full fiscal against the 8-10 percent it projected in April. But TCS' results were above market expectations, indicating the problems faced by Infosys may not be industrywide.

The two companies account for nearly a quarter of India's software exports.

Infosys cut its sales forecast more deeply than expected after global economic uncertainty eroded tech spending, hitting both its shares and hopes for a second-half recovery.

 Confirmed: TCS thrives, pips Infosys as IT bellwether

With TCS beating the Street's Q1 estimates, it seems the baton of the bellwether has formally been passed on. Reuters

While Infosys's June quarter net profit rose 33 percent as expected, market leader Tata Consultancy Services exceeded forecasts by posting a 38 percent annual jump in quarterly profit.

The dull global economy, heavy competition for market share and sharp currency fluctuations have slowed the pace of growth for Indian outsourcing companies, although in recent quarters Infosys has been underperforming key rivals, including TCS.

Infosys, India's No.2 software services exporter, had long been considered the industry bellwether for its ability to achieve and usually exceed revenue forecasts.

TCS, part of the Tata Group conglomerate that also makes cars and steel, does not make forecasts, although it said it expects to beat the industry export revenue growth forecast of 11-14 percent for this fiscal year set by trade body Nasscom. "This was a spectacular quarter for us, as of now there is no concern," TCS CEO N Chandrasekaran said post the results. A

And this confidence is showing in the numbers too as its operating margins of 27.5 percent is a major positive despite the company giving an eight percent wage hike.

Infosys, on the other hand said it sees revenue in dollar terms rising 5 percent to $7.34 billion in the fiscal year to March 2013, down from its April estimate of 8-10 percent growth.

Most analysts were expecting Infosys to trim its growth forecast to 6-8 percent.

Nasscom has forecast that the IT industry will grow 11-14 percent in the year to March 2013. TCS does not make revenue or profit predictions, but on Thursday, Infosys stopped the practice of guiding for the next quarter, citing volatile conditions.

"Infosys's guidance is bad and it will have implications for the sector as well. It clearly reflects a slowdown in Europe and in the United States and (problems with) the company's internal policies," said Paras Adenwala, a fund manager at Capital Portfolio Advisors.

Pricing pressure weighed more heavily on Infosys than TCS during the quarter. Infosys's billing rates were down 3.7 percent from the previous quarter, compared with 1 percent at TCS.

Infosys has been seeing "sporadic pricing renegotiations" and demands for discounts, chief executive S.D. Shibulal said.

Infosys shares closed down 8.4 percent. TCS shares ended 1.8 percent lower ahead of the results, and the sector index closed down 5.15 percent.

The valuation gap between TCS and Infosys will only widen, said industry experts. According to JP Morgan, polarisation in performance is here to stay but there will be a gap in valuations, too. As has been the case for the last six quarters, shares of Infosys fell as much as 10 percent as the company failed to meet not only the Street's expectations but its own guidance too, which suggests that the company does not have revenue visibility.

"The change of guard has been occurring for the past two-to-three quarters. The change is final and I would go as far as to say that we really should stop calling Infosys the bellwether of the IT industry as it does the IT industry a disservice. I believe that there are many company-specific issues regarding Infosys,"Partha Iyengar of Gartner told CNBC-TV18.

Devang Mehta of Anand Rathi Securities too agrees that TCS has time and again proved that it is the number one IT company by doing extremely well on all fronts. "We still expect that TCS will keep on outperforming for some time. May be in terms of valuation catch-up Infosys will do a little bit, but still we feel that on the demand front as well as on the guidance front, Infosys would not do anything spectacular and TCS will remain our top pick for some time to come," he told ET Now.

Infosys, whose customers include Bank of America and BT Group , reported net profit of 22.9 billion rupees in the quarter.

Revenue rose 28.5 percent to Rs 9620 crore as it added 51 clients in the quarter. It added a net 1,157 employees, lifting its headcount to 151,151.

By comparison, TCS posted net profit of Rs 3280 crore, topping a forecast for Rs 3050 crore , on a 38 percent increase in revenue to Rs 14900 crore. It added 29 clients and 4,962 staff, bringing its workforce to 243,545.

"Customers understand that the macro is what it is and they have learnt to operate in that environment ... so the decisions are getting made, deals are getting signed," TCS CEO N. Chandrasekaran told reporters.

After it gave disappointing guidance during its April results announcement, Infosys came under fire from investors for what some said was an overly conservative approach that put it at a disadvantage to rivals, adding to pressure on Shibulal, who took the reins last year.

Infosys also held on to cash of $3.7 billion at the end of June, making some investors restless over its unwillingness to make a big acquisition or return some cash to shareholders.

"If you look at the environment, it is still very uncertain," Shibulal told reporters on Thursday.

"In the financial services industry, in which we have 34 percent dependency, there were multiple events. I think sitting here in April, we could not have foreseen any of the events. The pipeline continues to be OK, but the question is how fast we can close (orders)," he said.

Infosys, TCS and Wipro are part of an export-driven outsourcing industry that benefits from efforts by global companies to cut costs and boost efficiency.

"Infosys is talking about an uncertain environment, clients not sure, budgets getting delayed, but if you look at TCS, they are saying clients are pretty aware, they have prepared the budget accordingly and they are spending their budget accordingly," said Hardik Shah, analyst at KR Choksey Shares and Securities.

With inputs from Agencies

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Updated Date: Dec 20, 2014 10:15:07 IST