Tata Consultancy Services Ltd (TCS) has reported a 3.8% increase in operating profit in dollar terms for the March quarter, almost double the 2.1% growth reported by Infosys Technologies Ltd last week. With this, the firm has beaten Infosys in profit growth in each of the past four quarters.
But the markets aren’t likely to be impressed since its revenue growth of 3.1% is considerably behind Infosys’s growth of 5.2%. In the December quarter, the two firms were neck-and-neck in revenue growth. In the preceding two quarters, TCS was ahead of its competitor.
This had led to a belief that TCS would lead in revenue growth, with the recovery in demand for information technology (IT) services gathering steam. Having ended the year on a relatively subdued note, the asking quarterly growth rate would be higher for TCS to finish the current year on a par with Infosys.
TCS has said that it expects revenue to grow by 16-18% this year. To meet the upper end of the guidance, it needs to grow revenue at a quarterly average rate of 3.6%. To achieve an 18% annual revenue growth, TCS needs to grow revenue at a quarterly average rate of 4.2%.
This is not impossible, but the subdued revenue growth in the March quarter could lead to some dampening in investor sentiment. One of the reasons for TCS’ poor growth is because of the rupee’s sharp appreciation against the pound and the euro last quarter. This is because it gets a larger proportion of revenues from Europe.
But according to one analyst, it’s also possible that the company was restrained in terms of resources because it was operating at high employee utilization levels of 80%-plus.
The firm has now been aggressively hiring software professionals and has added at least 10,000 employees net of attrition last quarter. This amounts to an addition of almost 8% to its workforce in a single quarter.
There’s little doubt that demand for IT services has recovered sharply and market leaders such as TCS and Infosys are best placed to capitalize on the increased demand. But the markets are already factoring in revenue growth in dollar terms of at least 20% and it seems difficult that these firms will beat existing estimates by a fair margin.
In TCS’ case, it is operating at record margins, having squeezed out efficiencies in the system and by operating at high utilization levels. One concern is that margins may be flat or may inch downward from current levels, adding pressure to earnings.
Of course, TCS is also worse off compared with Infosys in terms of the expected increase in tax charges?in the near?term.
In this backdrop, it isn’t surprising that TCS’ shares have stopped outperforming those of Infosys this year, after a stellar performance in the previous year.
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