Shares of Infosys Technologies Ltd have underperformed those of Tata Consultancy Services Ltd (TCS) by a high margin in the past two years. Much of this, of course, was to undo the outperformance in 2008, when investors flocked to stocks they considered relatively safer during the financial crisis.
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But TCS shares haven’t merely played catch-up since 2009. They have continued to outperform, spurred by better financial performance since the recovery from the financial crisis. In the eight quarters since the December 2008 one, TCS’ profit before interest and tax has grown at a compounded quarterly rate of 6.4%, double that of Infosys.
A report by Nomura Financial Advisory and Securities (India) Pvt. Ltd suggests that Infosys’ underperformance will reverse in the next fiscal. Aswhin Mehta and Pinku Pappan, analysts at Nomura, said Infosys’ underperformance on revenue growth is largely explained by the telecom vertical, which suffered because of a significant ramp down by British Telecommunications Plc (BT). They say the quarterly revenue run rate of the BT account has dropped from $100 million (around Rs 450 crore today) in the March 2008 quarter to $30-35 million currently.
Assuming a linear drop in BT’s revenue contribution, the analysts conclude that Infosys’ erstwhile top client dragged the overall growth by 2.5 percentage points in the past 12 months. So, while the company lagged TCS’ revenue growth by 1.4 percentage points in the last 12 months, adjusted for BT’s contribution, its growth is about 1.1 percentage points higher. Having ramped down significantly already, the BT account is expected to stabilize. As a result, it shouldn’t drag the overall growth as it has done in the past eight quarters or so.
According to Nomura, in the past 12 months, Infosys has done better than TCS in key verticals such as banking and financial services, manufacturing, and retail, which together account for 70% of revenue for both companies. All this suggests that Infosys’ underperformance, at least as far as revenue growth goes, wasn’t that much. Also, with the gap in terms of profit margins having narrowed considerably, the scope for continued underperformance on this front remains limited.
On the contrary, Nomura believes that Infosys is better placed on the pricing and margin fronts, thanks to a higher proportion of revenue coming from the discretionary spend, better scope for increasing the offshore proportion of work, a favourable employee pyramid mix and scope for improving employee utilization.
To be sure, this is not the consensus view on the Street. But there’s little doubt that at the net profit level, Infosys should do better, as TCS will take a larger hit in terms of tax rates with benefits on software technology parks expiring. Besides, its past underperformance increases chances of a relatively better run.
Graphic by Ahmed Raza Khan/Mint
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