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An employee walks past a signage board in the Infosys campus at the Electronics City IT district in Bangalore (REUTERS)
An employee walks past a signage board in the Infosys campus at the Electronics City IT district in Bangalore (REUTERS)

Infosys in a sweet spot as it races past TCS on profit growth in FY21

  • Infosys’s outperformance has been rewarded on the Street, with its one-year returns being far superior compared to TCS

On Monday, in response to Tata Consultancy Services Ltd’s better-than-expected December quarter results, investors drove the company’s shares up by 1.8%. On the same day, interestingly, they re-rated Infosys Ltd’s shares upwards by nearly 5%.

The message from the Street was clear. If TCS has managed to beat estimates, Infosys, with momentum on its side, can be expected to do even better. As it turns out, investors were right. The latter has raced past its peers in terms of growth this financial year, and the momentum now seems to be much stronger.

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In constant currency terms, Infosys’s revenues have risen 6.6% year-on-year, compared to a mere 0.4% growth in the case of TCS. What’s more, trailing 12-month profit was up 21.2% in the case of Infosys, compared to just 7.1% for TCS. In the previous financial year, both firms saw their profits grow by about 3%.

And, in a clear sign that the growth differential may continue for some time, Infosys announced that the total contract value (TCV) of large deals signed in Q3 stood at $7.1 billion. This includes only deals of over $50 million. In contrast, the TCV of all deals (large and small) signed by TCS was lower at $6.8 billion. Coupled with this, the fact that Infosys is only three-fifth the size of TCS means that its growth potential is higher.

Infosys growth
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Infosys growth

“It’s like Infosys is batting on a different wicket," said an analyst at a domestic institutional brokerage, requesting anonymity.

While most Indian IT companies will end up with a decline in revenues in FY21 owing to the impact of the pandemic in mid-2020, Infosys has guided for 4.5-5% growth this fiscal year. In other words, its market share gains this year are massive.

“Both Infosys and TCS are among the biggest beneficiaries of the accelerated shift to the cloud and the digital transformation clients are seeking globally. This is simply because large customers prefer vendors with a full range of services to make this large transformation," added the analyst quoted above.

One of the reasons Infosys has left TCS behind could be that its mix of clients were relatively less impacted by the pandemic as compared to TCS’s client base. TCS, for instance, has a higher exposure to European clients, where growth has been sluggish. But even in North America, Infosys has done far better with 12% year-on-year growth in the third quarter, compared to a 0.2% drop in the case of TCS.

Infosys’s outperformance has been rewarded on the Street, with its one-year returns being far superior compared to TCS’s. About a year ago, it traded at a valuation discount of over 25% to TCS. This has come down to just about 10% now.

While the better Q3 results may drive a further re-rating, the discount to TCS may stay for a while. After all, given the company’s erratic performance in the past, investors may want to make sure FY21 isn’t the proverbial flash in the pan.

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