Home >Markets >Mark To Market >Infosys outperforms TCS; guidance shows damage from covid is minimal

After industry leader Tata Consultancy Services Ltd reported a sharp drop in revenues and profits for the June quarter, the Street’s expectations from its peers were running low. But first, Wipro Ltd posted a much better control of costs and, hence, better-than-expected profits. Infosys Ltd has followed this with an even better performance, trumping its peers both on revenue as well as profit growth.

Infosys’s revenues grew 1.5% in constant currency terms year-on-year, compared to a 4.4% and 6.3% decline for Wipro and TCS, respectively. What’s more, while TCS reported a 9.9% decline in operating profit, Infosys’s profits rose as much as 10.2%. The large gap, which existed between the profit margins of Infosys and TCS, has narrowed considerably as a result.

Graphic: Satish Kumar/Mint
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Graphic: Satish Kumar/Mint

A bigger reassurance for investors came from the firm’s decision to reinstate its annual revenue guidance. The 0-2% constant currency revenue growth guidance for the current fiscal implies no major damage to the company’s revenues from covid-19.

“Infy’s FY21 revenue outlook implies this will mark the second year in a row where Infosys will outgrow TCS. Besides, the margin outlook implies that Infosys will defend/improve margins this year after multi years of decline through the last several years. We see ~8-10% EPS upgrades prima facie, and would push the encore for valuation discount relative to TCS to narrow," Emkay Global Financial Services analysts said in a note to clients.

While TCS does not give a formal guidance, it has been saying for more than three months now that it expects revenues to be flat on a year-on-year basis only in the March 2021 quarter. Analysts said TCS’s revenues could fall 5% in FY21.

Infosys’s confidence comes from deal wins, as well as healthy execution. The $1.74 billion large deal wins are higher than the order wins in the March quarter, implying the company has a decent order pipeline. Importantly, the key financial services vertical reported growth of 2.1% year-on-year. Comparatively, TCS saw a 4.9% decline in constant currency revenue in financial services. The vertical generates about 30% revenue for both companies.

According to the Infosys management, it saw good volumes in the financial services vertical last quarter, particularly from the banking clients in the Americas. It won five large deals in this segment last quarter, and the project pipeline is healthy. The share of digital services rose to 44.5% of Infosys’s revenue, up from 35.7% in the year-ago quarter, which would also have helped margins. Infosys’s American depository receipts rose nearly 15% in early trading, and have outperformed TCS shares by a wide margin on a year-till-date basis.

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