Firing on all cylinders Tata Consultancy Services outperforms again

Will Tata Consultancy Services be crowned the undisputed king of the IT industry, questioned a leading financial newspaper earlier on Tuesday. If the software services exporters second quarter performance was to be considered then it could very well be.

TCS beat street expectations on Tuesday evening,  a similar story repeated quarter after quarter in recent years. Its net profit rose 34 percent year-on-year to Rs 4,702 crore and revenue gained 34 percent to Rs 20,977 crore.

In US Dollar terms, its profit was up 16 percent to USD 748 million, while revenue rose 17 percent to USD 3.34 billion.

The Mumbai-based firm is India’s largest IT company and has continued to march way ahead of its Bangalore-based rival Infosys and the rest of the pack that follows.

Infosys, once the bellwether, lost ground to TCS in the last couple of years, amid a management rejig and its continued focus on protecting margins, even as rivals offered more flexibility in pricing. Last week, Infosys too reported better-than-expected results for the July-September quarter, but TCS’ performance once again shows Infy has a lot of catching up to do.

TCS’ stellar performance was no doubt helped by the sharp depreciation in the Rupee last quarter, but new deals have also continued to flow in and across geographies its seeing a good momentum. 

“It has been another great quarter. We have demonstrated all-round strong growth across markets and industries, highlighted by efficient and rigorous execution…“We continue to see a robust demand pipeline across markets,” said N Chandrasekaran, MD and CEO.

TCS’ volumes rose a little over 7 percent in Q2, a nine quarter high. Its operating margin rose to 30.1 percent.

“Strong volumes, currency tailwinds and firm execution helped us post industry-leading operating margins in this quarter,” said Rajesh Gopinathan, CFO.

With the strong growth momentum continuing, TCS has now plans to increase its headcount too.

Chandrasekaran told reporters in Mumbai that the pipeline was looking good and they needed to look at scaling in Europe.

Infosys turnaround continues as Q2 sales beat expectations, FY14 revenue guidance raised

India’s second largest software services exporter Infosys reported a better-than-expected revenue growth for the second quarter and also raised the lower end of its revenue guidance for the full year, signs that turnaround at the once bellwether that has lost ground to its rivals in recent years is clearly gaining momentum.

The Bangalore-based company has faltered in recent years. It took its foot of the revenue accelerator as it focused more on its margins, in turn allowing rivals like Tata Consultancy Services to race quite ahead.

In the last several months,however, the company has given ample signs that it is now more flexible when its comes to dealing with clients on pricing.

In the July-September quarter, Infosys’ net profit rose near 2 percent year-on-year (1.4 percent sequentially) to Rs 2,407 crore. Its revenue was up 32 percent from a year ago (15 percent quarter-on-quarter) to Rs 12,965 crore.

In US Dollar terms, however, its net profit was down 11 percent YoY (-8 percent QoQ) to USD 383 million, due to visa related charges.

Its revenue was up 15 percent YoY (4 percent sequentially) to USD 2,066 million.

This was the first full quarterly results since founder Narayana Murthy returned to the company as executive chairman.

Software services exporters have been boosted by a pickup in the US market (largest revenue geography for firms like Infosys) and the recent depreciation in the Rupee.

Infosys raised its lower end of what some may argue conservative guidance on Friday. It now expects its full year (FY14) revenue to rise 9-10 percent, compared with its 6-10 percent it had forecast earlier. Industry body NASSCOM has forecast 12-14 percent growth for the full year.

“During the quarter we witnessed broad-based volume growth, robust client additions, five large deal wins and increased sales momentum of our big data and cloud offerings. This growth is a result of our focus on execution, which helps our clients achieve their objectives. We will continue with planned investments and initiatives to explore new avenues of growth. We remain watchful of the sustainability of improving global economic fundamentals,” said SD Shibulal, CEO and MD.

Infosys and its subsidiaries added 68 clients in the quarter. 2,964 employees were added on a net basis in Q2 and as of Sept 30th it had 1,60,227 employees. 

The street cheered the results with the stock closing up 4.7 percent to Rs 3,274.50 on NSE. The shares hit a 52-week high of Rs 3,338 earlier in the session.

Here’s a quick view of how some analysts viewed Infosys’ second quarter performance.

“Infosys reported better than expected results. Operating cash flow improved to 123 percent of EBIT (earnings before interest, taxes) that is one of the highest in recent years (was 79 percent of EBIT in Q1 FY13). We believe the strength and continued improvement in cash flows is one of the best indicators of the underlying momentum and strength of business for Infosys. Maintain Overweight as the stock remains significantly undervalued in our view.” – Morgan Stanley.

“We believe that the guidance is conservative and strong growth metrics this quarter raise the probability of beating the guidance at top end. We remain positive on the stock given improving growth trajectory and reasonable valuations. Maintain Buy.” – Religare.

“We do not believe that investors must read anything amiss into growth implications for the coming two quarters due to the unchanged USD revenue guidance (at the upper-end). It’s all about the significant revenue beat, which will please investors, in our view.” – JP Morgan.

“The results demonstrate that the company is on the mend. An improved demand environment has also helped overall numbers. Performance is the best way to assuage concerns on reorganisation and senior management exits. That the company has done it for the second consecutive quarter is creditable.” – Kotak.