Tata Consultancy Services Ltd (TCS) had stolen a march over Infosys Technologies Ltd in the first two quarters of this fiscal year. Infosys’ operating profit fell by 1% in the June quarter and grew by 3.3% in the September quarter on a sequential basis, while TCS’ profit grew by 5.3% and 9.2% in the two quarters.
When Infosys reported a return to high growth rates for the December quarter, one was tempted to believe that TCS’ days of outperformance were over. In fact, CLSA Research referred to Infosys’ December quarter results as “the return of the king” in its flash note on the results. But TCS has beaten Infosys even in this quarter, albeit by a lower margin compared with the first two quarters of the year. Its operating profit grew by 7% sequentially, higher than Infosys’ profit growth of 6.2%.
Thanks to its outperformance in the last three quarters, its quarterly operating profit of Rs2,089 crore is 15.6% higher than that of Infosys. Exactly a year ago, in the third quarter of the preceding fiscal, its operating profit had fallen around 2.3% below that of Infosys. In fact, for much of FY09, profits of the two companies were neck-and-neck. This year, TCS has decisively gone ahead of its competitor (see chart).
Graphic: Yogesh Kumar / Mint
What’s more, there’s a similar trend even in the area of cash flow, which, in the past, has been a bugbear for TCS. In the first nine months of this fiscal year, TCS’ operations generated cash of Rs5,668 crore, which is 16.6% higher than that of Infosys’ cash generation of 4,862 crore. That doesn’t seem like a great achievement, when compared with the fact that TCS’ revenue is 33% higher. But consider this: In the year-ago period, its cash from operations of Rs2,974 crore was 27% lower than that of Infosys. The company has indeed come a long way this fiscal year.
According to an analyst with a domestic brokerage, growth at Infosys was led by the financial services sector, while TCS has seen decent growth in most verticals. In fact, verticals such as telecom, hi-tech and energy and utilities grew at rates that were higher than the company average. Even growth in financial services was higher than the company average in volume terms, although a shift in work offshore led to revenue growth that was on par with the average.
To some extent, TCS’ superior growth this fiscal year has been rewarded by the markets. A year ago, the company’s market capitalization was at a 30% discount to that of Infosys. Now, its market cap is around 1% higher. In terms of price-earnings multiples, Infosys still trades at a premium of around 10% to TCS because of its consistent track record. With TCS outperforming for the third straight quarter, there are increasing signs that its performance too is consistent, and some of the valuation gap should fill when markets open on Monday.
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