IT stocks took a beating on Tuesday, despite TCS’s decent Q4 earnings. Analysts say the sector’s premium valuations demanded a beat on the earnings front. But the in-line results meant that further earnings upgrades were out of question, leaving investors disappointed
MUMBAI: Infosys Ltd will report its March quarter earnings for fiscal year 2021 later today. Analysts at brokerages estimate sequential revenue growth of 2.5-3% in constant currency terms, lower than the 4.2% growth reported by sector leader Tata Consultancy Services Ltd (TCS). The latter’s growth was boosted by two large recent deal wins, which accounted for about 45% of incremental revenues in Q4.
But even if Infosys lags TCS on sequential growth rates in Q4, the momentum the Bengaluru-based firm has gained in the past two years will ensure that its fiscal 2020-21 growth rates are far ahead of the latter.
Infosys’s revenue growth in dollar terms is estimated at 6% for FY21, compared with a mere 0.6% growth in the case of TCS. This will be the third time in the past five years that Infosys will beat TCS in terms of revenue growth. But the degree of outperformance will be far greater.
What’s more, while TCS has been consistently beating Infosys in terms of incremental revenues for years now, this will be the first time in twelve years that the latter will beat the sector bellwether in terms of incremental revenues.
Again, the degree of outperformance is expected to be massive, with Infosys revenues expected to grow by roughly $800 million in FY21, compared to merely $143 million in the case of TCS. It's almost as if the pandemic hasn't impacted the trend in Infosys's annual incremental revenues, while for TCS and most other firms, covid has had its expected impact.
Apart from a higher share of incremental revenues, Infosys has also enjoyed a higher share of deal wins in FY21.
Analysts at research house Investec point out that Infosys had announced more deal wins than TCS in the third quarter of FY21, despite only disclosing deals larger than USD 50 million. Infosys announced that the total contract value (TCV) of large deals signed in Q3 stood at $7.1 billion. In contrast, the TCV of all deals (large and small) signed by TCS was lower at $6.8 billion. The differential means Infosys growth rates could remain strong going ahead.
“While significant large wins are likely to see revenue accretion only in Q2FY22, higher revenue accretion from smaller wins could lead to a better revenue performance," said the Investec report dated 5 April. They expect Infosys to guide for a revenue growth of 12-14% for FY22.
“It’s like Infosys is batting on a different wicket," an analyst at a domestic institutional brokerage had told Mint after the Q3 results season. Its higher revenue growth and deal wins mean that its market share gains this year have been massive.
One of the reasons Infosys has left TCS behind could be that its mix of clients was relatively less impacted by the pandemic as compared to the latter's client base. TCS, for instance, has a higher exposure to European clients, where growth has been sluggish. But it has also done relatively better in major markets such as North America. Infosys reported 12% year-on-year growth in Q3 in North America, compared to a 0.2% drop in the case of TCS, suggesting either that its clients in the region were less impacted by the pandemic, or market share gains owing to an aggressive sales push.
Indeed, some analysts worry about margins going forward. “Transition costs on large deals are a likely headwind on the margins front," Investec analysts said in the note.
Meanwhile, IT stocks took a beating on Tuesday, despite TCS’s decent Q4 earnings. Analysts say the sector’s premium valuations demanded a beat on the earnings front. But the in-line earnings meant that further earnings upgrades were out of question, leaving investors disappointed.
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