TCS Results Disappointing
Unlike its rival Infosys, which reported all-round growth in revenues, margins and earnings, Tata Consultancy Services' (TCS) second quarter numbers were slightly soft.
TCS, for the fifth straight quarter, missed the Bloomberg sales estimate by 23 basis points (bps), reporting revenue of Rs 27,165 crore. Moreover, TCS failed to impress markets either for the reporting quarter or for the second half of the year.
TCS reported dollar revenue growth of three per cent at $4,156 million and constant currency revenue growth of 3.9 per cent. In comparison, Infosys' dollar revenue grew six per cent sequentially and constant currency revenue growth was 5.9 per cent, excluding the one-time gain.
In terms of margins, which have always been TCS' strong suit, it was Infosys that did better on this parameter in the second quarter. Infosys' reported Ebit (earnings before interest and tax) margin came in at 25.5 per cent and expanded sequentially by 150 bps (a basis point is a hundredth of a percentage point). TCS' Ebit margin came in at 27.1 per cent, an expansion of 78 basis points.
Due to its improving financial performance over the past couple of quarters, Infosys had managed to reduce the valuation gap with TCS. At Tuesday's closing prices, TCS traded at 18 times 2016-17 estimated earnings against 16 times for Infosys. While sustained healthy performance is a prerequisite for this discount to reduce further, analysts believe there is a higher probability of Infosys delivering a surprise on this front than TCS. While most analysts believe TCS will continue to command some premium (about five-eight per cent) in valuations over Infosys, others are more optimistic.
"Given its gradual recovery to industry growth and our belief that Infosys' performance in 2016-17 will be at the higher end of the industry band, we see it commanding a premium to peers and eradicating the discount to TCS," said analysts at Motilal Oswal Securities.
The Japanese business and its insurance play through Diligenta are pulling down TCS' numbers. The company said that Latin America, which was under pressure for some quarters, now is back on the growth trajectory. TCS management said that Japan and its Diligenta will continue to be slow.
What have been pulling TCS numbers are Japan and its insurance play through Diligenta. The company said Latin America, which was under pressure for some quarters now, was back on the growth trajectory. The TCS management said Japan and Diligenta would continue to be slow.
Another mismatch at these companies was the geographical growth. While Infosys reported that North America grew by almost six per cent and Europe grew by 8.3 per cent, TCS came in rather soft with North America at 3.1 per cent and Europe at 6.6 per cent sequentially.
Other than these numbers, TCS reported volume growth of 4.9 per cent compared to Infosys' 3.7 per cent. This growth in volumes and the management's commentary that the order book for the second quarter was the highest ever made the company increase its hiring target to 75,000.
What also came in as a big positive at TCS was the management commentary. At Infosys, the management mentioned that for the third quarter they see some headwinds, but they expect to bet the guidance for FY16. In case of TCS, traditionally the second half of the quarter is a tad soft, but the management did not sound cautious.
Natarajan Chandrasekaran, managing director and chief executive officer of TCS, also sounded confident about the digital business. He said the digital business had done well and was now 13 per cent of its revenue, up from the earlier 12.5 per cent.
While analysts were expecting Infosys to increase its guidance for the second half, the company maintained its constant currency revenue growth guidance of 10-12 per cent for 2015-16. "After a disappointment at Infosys (revenue below Motilal Oswal Securities Ltd estimates, no revision of guidance), the street was expecting TCS fare better but that has not happened. We were expecting a stronger forex-related other income at TCS. Head count growth at 10,685 Q-o-Q to 335,620 is slower than our estimate of 338,349 (13,414 net adds) as was utilisation at 82.3 per cent (versus estimate of 83 per cent). We continue to remain neutral on TCS and prefer Infosys and HCL Tech," said Ravi Shenoy, vice-president, Motilal Oswal Securities (MOSL)