Infosys’s forecast for the current year suggests a sharp drop in growth rates in the second half of the fiscal
Shares of Infosys have outperformed those of TCS by about 22% in the past three months
Mumbai: Momentum is on the side of Infosys Ltd. After Tata Consultancy Services Ltd (TCS) reported a drop in revenue growth to single-digit levels in the September quarter, Infosys Ltd continued with double-digit growth for the fourth straight quarter.
Infosys’s revenue grew 11.4% in constant currency terms, on the back of strong double-digit growth in nearly all of its business verticals. At TCS, growth in constant currency fell to 8.4% in the September quarter, from 10.6% in the preceding three months.
While Infosys may be better off than TCS, growth is unmistakably slowing down for both of India’s largest IT services companies. After adjusting for the impact of acquisitions, organic growth at Infosys is estimated to be around 9.9%, say analysts. In the June quarter, Infosys’s organic growth was estimated at about 11.8%.
“We had expected weak financial services, and that did play out. However, the slowdown spread to other verticals, viz. retail and parts of manufacturing. Profit margin declined sharply y-o-y, with elevated impact due to aggressive hiring at a time of an unanticipated slowdown," analysts at Kotak Institutional Equities said in a note on TCS results.
Infosys’s forecast for the current year suggests a sharp drop in growth rates in the second half of the fiscal. It expects to grow by 10% at best this year, despite growing by more than 11.5% in the first half of the year. This implies growth of about 8% in the second half in reported terms, and only about 6.5% on an organic basis.
Of course, Infosys appears to be too conservative with the forecast and growth may end up being higher. An analyst at a multinational brokerage, who requested anonymity, said, “It does look like Infosys is being overly conservative, as the current guidance implies nearly no growth in the remaining two quarters on a sequential basis." Even so, the fact remains that growth is slowing down.
This isn’t entirely surprising. “Tier-1 IT companies had provided a cautious outlook on BFSI (banking, financial services and insurance) spends due to weakness in capital markets and European banks and soft spends in US regional banks undergoing M&A," analysts at Kotak Institutional Equities said in a 30 September note to clients. “Tech spends will be volatile in the short term as firms balance short-term priorities with long-term need for investments."
Even so, the sharp slowdown in growth at TCS has taken both analysts and the company itself by surprise. TCS had hired and invested assuming a certain level of growth, which didn’t come by, and as a result, its profit margins narrowed to a nine-quarter low. In contrast, Infosys’s margins widened 120 basis points from the lows of the June quarter.
TCS also told analysts that visibility for the second half of the year is not very strong. Analysts at Kotak say the verticals facing a slowdown such as BFSI, retail and parts of manufacturing, contribute 56% to TCS’s revenue. The surprise element in its results was the sharp slowdown in business from the retail segment. In Infosys’s case, revenue from this vertical grew just 1%, in stark contrast to double-digit growth in most of the other segments. “Business in the retail vertical is closely linked to consumer sentiment, which has been weak lately owing to uncertainties in the global economy," the company said in a press conference.
“Going by TCS’s commentary, there is a slowdown in quite a few areas. While Infosys may have weathered the storm in the first half of the year, it is likely things will catch up in the second half," said the analyst from the multinational brokerage.
For now, investors seem to be betting that the momentum in Infosys will continue to reap dividends. In the past three months, shares of Infosys have outperformed those of TCS by about 22%. The September quarter earnings announced by the two companies also will be seen as supporting this shift in investor preference.