In the three-month period since the March quarter results season began, shares of competitor Tata Consultancy Services Ltd (TCS) had underperformed those of Infosys Technologies Ltd by around 8%. Some of this had to do with TCS’ lower revenue growth of 3.1% in dollar terms in the March quarter, compared with Infosys’ growth of 5.2%. Having ended fiscal 2010 at a relatively subdued note, one concern was that the asking quarterly growth rate would be higher for TCS to finish the current year on par with Infosys.
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The company’s performance in the June quarter would blow away any such concerns. TCS reported a 6.4% growth in dollar revenues on the back of a strong 8.1% jump in volumes. Infosys’ volume growth was comparable at 7.6%, but its revenue growth was much lower due to a sharp drop in offshore billing rates. TCS’ revenue took a hit of only 32 basis points (bps) on account of lower billing rates.
Infosys also disappointed the Street on margins, while TCS has exceeded expectations. Based on the average estimates of six institutional brokers, TCS’ Ebitda (earnings before interest, taxes, deprecation and amortization) margin was expected to decline by 130 bps quarter-on-quarter. Instead, it reported a 57 bps decline in margin. Infosys, on the other hand, reported a 233 bps decline in Ebitda margin. Note here that TCS gained from a small write-back of provision related to bad debts last quarter. If the provision had remained at March quarter levels, its margins would have dropped by about 150 bps. Infosys, on the other hand, had a write-back in the March quarter and a charge in the June quarter on account of bad debts. If the charge had been uniform in both quarters, its margins would have dropped by a lower 160 bps.
The Street, however, is likely to focus on the reported profit, since such changes in provisions happen regularly. And TCS’ net profit is considerably ahead of Street estimates. TCS shares had gained some ground (in relative terms) since Infosys’ disappointing results announcement earlier in the week. Thanks to its strong results, it can be expected to outperform in the near term.
The company’s reported earnings before interest and taxes (Ebit) of Rs2,231 crore is 27% higher than Infosys’ reported Ebit of Rs1,755 crore. In early 2009, the two were on a par. TCS has gained considerable ground vis-à-vis Infosys in the past year, and the performance in the June quarter is likely to ensure that the company’s shares start outperforming again.
Graphic by Yogesh Kumar/Mint
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