Tata Consultancy Services Ltd’s (TCS) September quarter results aren’t materially different from those of Infosys Technologies Ltd. The latter grew revenue and Ebitda (earnings before interest, tax, depreciation and amortization) by 12.1% and 18%, respectively, while TCS’ revenue grew 13.1% and its Ebitda rose by 15.8%. Still, the markets are likely to cheer TCS’ results, even while investors have shunned Infosys shares since its results announcement last Friday.
What gives? For some reason, the weight of expectations was higher for Infosys. Despite its extraordinarily high growth last quarter, reported revenue and profit were just 2.5% higher than consensus estimates of six institutional brokers complied by Mint. In TCS’ case, reported revenue and profit are 4.4% and 7.6% higher than consensus estimates. Analysts were expecting Infosys to beat TCS in terms of revenue growth, and since the former’s margins had taken a sharp beating in the June quarter, its profit, too, was expected to rise at a much faster rate. TCS has surprised the Street on both these counts and is hence likely to be rewarded when trading resumes on Friday.
Already, TCS shares have outperformed those of Infosys by a wide margin in the past three months. Prior to its June quarter results announcement, TCS traded at a 16.5% discount to Infosys based on its trailing price-earnings multiple. At current prices, the discount has narrowed to just 7.4%. This is partly because of TCS’ relatively better performance in the June quarter and the disappointment over Infosys’ September quarter results released last week. The discount could now narrow further. Of course, another factor that’s worked against Infosys shares is that the markets were unhappy about the company’s guidance, especially for the fourth quarter ended March 2011. TCS, on the other hand, doesn’t give any guidance—so all of the markets’ attention will be directed to its September quarter performance, which has been stellar.
Graphic: Yogesh Kumar/Mint
Apart from the higher-than-expected revenue growth, TCS also managed to improve Ebitda margins by 72 basis points, with productivity improvements and exchange gains offsetting the impact of higher wages on account of promotions and high variable payouts to employees. The company also added more than 10,200 employees (net of attrition), the highest in its history, indicating a strong outlook on demand. In the last four quarters, TCS has added more than 30,000 employees, increasing its employee base by around 25%. Also, cash flow from operations rose by around 44% compared to the June quarter and free cash flow amounted to a healthy 14.6% of revenue last quarter, compared with just 10.6% in the June quarter.