share computers software companies Tata Consultancy Services (TCS)

Tata Consultancy Services (TCS) (updated - 18 Jan 2012)
The December 2011 quarter performance and the subsequent management commentary by top tier IT players, including TCS and HCL Technologies on Tuesday, reflect a promising scenario notwithstanding macroeconomic woes in US and Europe. This, when compared with last week’s gloomy outlook from Infosys, supports our belief that the performance of the second-largest IT exporter can no longer be viewed as a barometer for the entire sector. Last Thursday, Infosys had warned against delays in project commencements from some of its clients. It also reduced its FY12 growth estimates from earlier aggressive expectations.

In a stark contrast to the cautious stance of Infosys, TCS, the country’s largest IT player, and the fourthlargest HCL Tech have not reported any significant difficulties in project ramp-ups. Moreover, the growth during the December quarter for the latter two players was secular across verticals.

While investors largely remain bullish on Infosys, given its high-margin operations and benchmark corporate governance, what is worrying is the company's inabilityto grow its business and therefore profits relative to its peers even in an atmosphere conducive to higher IT outsourcing.

A comparison of trailing twelvemonth (TTM) revenue and operating profit (EBIT) of TCS and Infosys in each of the five quarters ended December 2011 reveals that TCS has been able to clinch additional business at a faster pace. In the TTM to December 2011, TCS accounted for 65% or nearly two-third of the incremental revenue. The share of Infosys, on the other hand, fell to 35% from 41% a year ago, reflecting the difficulty in gaining new business. At the operating profit level, Infosys has been able to improve its performance in the past few quarters after losing money during the two quarters ended September 2010. But even there, TCS accounted for 68% of the operating profit in TTM to December 2011. This underscores the fact that mere better operating margin would not help; volume growth is equally essential for higher profits. Infosys has long been focusing on its margin-driven business and has enjoyed the highest operating margin in the top-tier segment. But TCS is not far away from Infosys in the margin game. The gap between margins of the top two players is narrowing fast. TCS reported an operating margin of 29%, over 200 basis points (bps) lower than Infosys’s profitability. The gap was as wide as 600 basis points three years ago.

These factors make the growth of TCS look far better when compared to Infosys. As HCL Tech’s CEO Vineet Nayar stated Indian IT vendors may see a windfall orders worth $10 billon from project renewals in 2012. Considering the management views of the two firms on future outlook, both TCS and HCL Tech appear to be in a better position to reap the benefits of new opportunities compared to Infosys.
Source - Economic Times

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