BackInfosys cuts guidance; TCS beats expectations
Infosys cuts guidance; TCS beats expectations
PremiumN. Chandrasekaran of TCS.
Mumbai/Bangalore: If investors and analysts expected to get a clear view of where the information technology (IT) sector is heading in a slowing global economy, the two IT heavyweights, Tata Consultancy Services Ltd (TCS) and Infosys Ltd—which posted April-June quarter results on the same day for the first time—provided little help with their contrasting outcomes and conflicting outlook.
Before the markets opened on Thursday, India’s second largest software exporter Infosys shocked investors by cutting fiscal 2013 growth guidance to 5% from 8-10% indicated in April. It attributed the cut to cross-currency volatility in its Western markets and a pricing decline.
Infosys’s results were particularly disappointing since the rupee had depreciated around 8% in the quarter against the dollar. And since every percentage-point dip in the rupee adds 35-40 basis points (bps) to the margins of IT companies, they were expected to do marginally better in the quarter under review. A basis point is one-hundredth of a percentage point,.
Infosys’s rupee gains were offset by a drop in pricing—3.8% from the trailing quarter. The silver lining was volume growth at 2.7%. Also, compared with 51 clients Infosys added in the quarter, TCS added 29.
TCS did gain 270 bps from the rupee, but these were offset by wage hikes (8% in India and 2-4% on-site) and hiring (13,831 employees) in the quarter. It also suffered a forex loss of ₹ 93 crore.
While TCS does not provide guidance, the management said it “continues to see good demand from global corporations" and “will deliver ahead of the Nasscom guidance if the currency levels do not fluctuate too much", even as Infosys chief financial officer V. Balakrishnan described Nasscom’s forecast as “ambitious".
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Software lobby body Nasscom has predicted 11-14% growth for the IT sector in fiscal 2013.
But analysts cautioned that TCS performed better than Infosys “only in relative terms". They noted growth was disappointing for both companies in dollar terms—a better indicator since Indian IT firms earn in dollars and spend in rupees.
Infosys’s revenue fell 1.1% to $1.75 billion from the preceding quarter and net profit dropped 10.2% to $416 million. TCS’s revenue rose 3.4% to $2.73 billion on a quarter-on-quarter basis, while its net profit rose 3.2% to $604 million.
The Infosys stock on Thursday dropped 8.15% to close at ₹ 2,265.25 on BSE, making it the biggest loser in the Sensex pack, as the benchmark index lost 1.47% to end at 17,232.55 points. It lost ₹ 11,548 crore of investor wealth, equivalent to $2.06 billion.
TCS, which declared results after market hours, lost 1.8% to end at ₹ 1,236.10. The BSE IT Index dropped 5.11% to close at 5,384.39 points, the biggest loser among sectoral indices.
For the last 13 quarters, TCS has posted better profit numbers than Infosys. And for the April-June quarter, TCS outperformed closest rival Infosys, no longer considered the bellwether of the IT industry. Investors, too, have been reposing more confidence in TCS, which gained 9.39% in the April-June quarter, while Infosys lost 12.65%.
Dipen Shah, head of research at Kotak Securities Ltd, said, “TCS’s results were mixed, with its dollar revenues coming in above expectations whereas Ebit (earnings before interest and tax) margins coming in marginally lower than what we had expected. Average realizations moderated by about 1.3%, indicating some pressure from clients and mix change. The management has maintained its optimistic outlook despite the uncertain macro scene and in contrast to cautious comments from Infosys. The comments likely reflect good visibility from large accounts and better execution."
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TCS chief executive officer (CEO) and managing director N. Chandrasekaran attributed the increase in June quarter volumes to “strong, secular growth across all our service lines and industry segments driven by robust volumes from key markets like North America (3%), Europe (10%) and the UK (25%)". Its India revenue, however, fell 7%.
On the other hand, Europe declined 8.1%, while North America grew 1.6 % sequentially for Infosys. CEO S.D. Shibulal said, “There is a lot of volatility, quarter-on-quarter, which is impacting our ability to predict the quarter."
In rupee terms, revenue for the June quarter was ₹ 9,616 crore, 8.6% growth sequentially on the back of depreciation of the rupee. Net profit, however, was ₹ 2,289 crore, a decline of 1.2%, impacting margins.
Margins declined 190 bps to 28% in the quarter. Balakrishnan said the decline was “planned, as we are hiring more on-site, and there are also increased visa costs. There was a benefit of 4% due to the depreciation of the rupee, but this was offset by the pricing decline". Infosys was not revising its stand of not giving pay increases, as of now, he said. “We will relook when we get a comfort level," he added.
The company didn’t provide guidance for the September quarter, again a surprising first, indicating the extreme uncertainty in its outlook.
“What we are running is a marathon, not a sprint," Shibulal said.
The company has not had a chief operating officer (COO) to drive execution, ever since Shibulal gave up that role to become CEO. However, he said a COO was not needed in the new structure, aligned to verticals. “In effect, we now have four (COOs). Earlier it was a single P&L. The business units are more autonomous now, and a lot of pricing, staffing and other decisions don’t even come to me," he said.
Avendus Securities Pvt. Ltd analysts said the Infosys guidance was a “dampener" and client-specific woes continue, so margins are likely to remain under pressure. “We revise our estimates downwards; maintain rating due to fair valuations," they said, pointing out that Infosys’s 5% guidance “implies a quarterly USD revenue growth of 3% over the next three quarters, which could be a difficult task in the current environment... We revise our USD revenue estimate downward to 4.6% in FY13, driven by a volume growth of 9.9%".
Dhananjay Sinha, co-head research (economist and strategist) at Emkay Global Financial Services Ltd, said, “Our analysts have cut Infosys’s revenue estimates by 3.5% for fiscal 2013 and 4.7% for fiscal 2014. We have also reduced the earnings per share by 0.5% for fiscal 2013 and by 1.6% for fiscal 2014." He added that while “TCS has done relatively better, both Infosys and TCS are facing pricing pressures due to erosion of volumes, which can be ominous for the results of the other IT companies that will follow".
Harit Shah, senior research analyst at Nirmal Bang Institutional Equities, said, “We do not see any upside for Infosys in the next two-three quarters. Infosys has to do some acquisition with the pile of cash ($3.8 billion) that it is sitting on to redeem itself in some way."
According to outsourcing consultancy firm TPI’s quarterly deal index, during the three months ended June, the total contract value of deals increased by 7%, both for the quarter and the year. However, the total number of contracts awarded has dropped. Some big-ticket deals, which had been rare till last quarter, helped to offset weaker deal activity during the period. According to the index, 11 mega deals were awarded during the quarter, the best since 2009.
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• S.D. Shibulal | You cannot drop price and create volume
leslie.d@livemint.com
Sapna Agarwal and Ashwin Ramarathinam in Mumbai, and Surabhi Agarwal in New Delhi contributed to this story.
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