Infosys Ltd’s shares are back in demand. Since the beginning of the June quarter results season, Infosys’s shares have outperformed those of Tata Consultancy Services Ltd (TCS) by as much as 17%. The valuation differential between the two companies has narrowed to under 10% from well over 20% before the results season began.

At this rate, a repeat performance in the September quarter may well wipe out the entire valuation differential. Are investors getting carried away? To start with, they cannot be blamed for the exuberance over the June quarter results. Infosys’s revenues grew by 4.49% sequentially to $2.256 billion in the June quarter, or about $30 million more than analysts’ consensus estimates. Even the most bullish analysts had estimated a growth of only about 3.5%.

Just three months ago, in April, the company had announced dismal results for the March quarter, with revenue growth falling short of analysts’ estimates by about $70 million. Back then, when the company’s chief executive officer Vishal Sikka said that he expected revenues to grow by 10-12% in financial year 2015-16, it had seemed like an overly ambitious target (certainly to this column). But revenues grew by 10.9% year-on-year in constant currency terms last quarter, after five quarters of single-digit growth. The target for the year now almost looks conservative.

There were a number of other positives. Volumes grew by an impressive 5.4% sequentially, the highest in the past 19 quarters. Work on onsite projects rose by 6.6%; a good sign, since it indicates new project starts, which will translate into revenues in the future as well. Growth in the infrastructure management services (IMS) line grew by 7.1% sequentially and by 20.2% year-on-year, far higher than the company growth rate. Again, this bodes well because the IMS segment has been a growth driver for the industry, and Infosys has had a relatively small presence here.

Employee attrition has come down considerably in the past year. Analysts at JPMorgan said in a note to clients that the difference between Infosys’s quarterly annualized attrition and that of TCS has dropped to just 60 basis points in the June quarter, from as high as 12.1 percentage points just four quarters ago. The new management has clearly done a good job of inspiring confidence among employees.

Infosys also did a good job of growing business with its top clients—the top ten accounts grew by 5.9% sequentially, higher than the company average.

According to analysts at Kotak Institutional Equities, each of these three metrics—growth in IMS, declining attrition and client mining—are important lead indicators of future growth.

On the flip side, profit margins and free cash flow generation continued to shrink. On a year-on-year basis, pre-tax profit fell by 2.2%. Free cash flow fell to 10.64% of revenues from 18.28% in the year-ago June quarter.

It’s worthwhile noting here that average price realizations fell by over 200 basis points for offshore services, for the third straight quarter. Clearly, the new management is chasing revenues at the cost of margins. But this isn’t necessarily a bad strategy, given the anaemic growth of the past few years.

Even so, investors shouldn’t get carried away with the good revenue performance in just one quarter. Other IT companies such as TCS and Cognizant Technology Solutions Corp. have been far more consistent with their performance. Analysts at JPMorgan believe TCS deserves to trade at a 17.5% valuation premium because of its better revenue growth and margin profile. It seems best, therefore, for investors to wait for more signs of consistency before making Infosys the most favoured stock in the sector. But for those who can stomach risks, siding with Sikka could turn out to be a joyride.

The writer does not have positions in the companies discussed here.

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