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.

Will Infosys cheer the markets on Friday?

 

Infosys was once the IT bellwether. reporting its quarterly results before its rivals and guiding of how things were likely to shape up for the entire industry. Its still reports ahead of its peers, but its no more the benchmark. A string of poor results over the last many quarters had raised many questions.

The company reported good results in the April-June quarter. And investors will be hoping the arrival of Narayana Murthy back at its helm, continued recovery in the US market (its biggest revenue geography) and the rupee depreciation will help the company report another good performance in the July-September quarter.

But, there have also been several top executive exits, Ashok Vemuri, the head of Americas, for instance. Vemuri is now the CEO of US-based IGate Corp. Similarly, Infosys’ global sales head Basab Pradhan too put in his papers earlier.

With the founder Narayana Murthy at the head and his son Rohan Murty likely to be named Vice President, investors will hoping for a smooth drive ahead.

Here’s a snapshot of what analysts are expecting from Infosys when it announces its Q2 results on Friday.

Dollar revenues could grow 2.6 percent quarter-on-quarter to USD 2,043 million led by timely ramp ups in large deals while rupee revenues could grow 12.6 percent sequentially. EBIT margins may improve 61bps led by rupee tailwinds but offset by wage hikes – ICICI Direct.

Sequential Dollar revenue growth could be 3.0-3.5 percent, which would be largely volume driven. Pricing is expected to remain flat. The revenue growth would be led by timely ramp ups in large deals. In Rupee terms, revenue growth is likely to be higher at 14.0-14.5 percent on the back of an average 11 percent depreciation in the Rupee. Infosys could raise its US Dollar revenue guidance to 9-12 percent from 6-10 percent due to improvement in demand. The Rupee EPS guidance is also likely to be raised, helped by currency tailwinds – HDFC Securities.

Expect Infosys to give a modest second half outlook. Its commentary on better margins in H2 could lead to EPS upgrades for the street – Morgan Stanley.

Sequentially, we expect 2 percent Dollar revenue growth. Infosys indicated 300 bps headwinds due to wage hikes, which would be offset by the currency benefits. So expect margins to be flattish – Citigroup.

Watch out for the Bangalore-based company’s margins in the second quarter, management commentary on the overall demand environment and its guidance for the rest of the year. Any update on Rohan Murty’s future role will also be closely watched.