TCS or INFOSYS - WHICH IS A BETTER BET?
By Ruma Dubey
This was probably for the first time ever that Infosys and TCS declared their quarterly numbers on the same day. The day started with Infosys, which was a huge disappointment and the day ended with TCS, which was very much in line with expectations.
The biggest disappointment in Infosys was its guidance which has been tempered down and it refrained from giving a quarterly guidance, a first of sorts. It cited the reason as ‘uncertain client spend’. The market was shocked with its forecast of just 5% growth in US dollar revenue for FY13 as against the earlier 8-10%. Its EPS in dollar terms is estimated at $3.03%, up 1% on a YoY. The management remained extremely cautious for the coming months and that, for marketmen was very spooky.
The rupee depreciated 9.7% in Q1. One percent rupee depreciation = 40 bps rise in margins. So in an ideal world, both should have been show a rise of at least 388 bps in the margins. But Infosys EBIT margins fell 190 bps which clearly indicates huge pricing pressures. TCS also showed a contraction from 27.62% to 27.5%; not as sharp a fall as Infosys indicating there is some pricing pressure but not as acute as Infosys.
On the cash front, obviously, Infosys is far ahead of TCS and for the past few months has been trying, unsuccessfully, to acquire companies in either Europe or USA. It has clarified that it does not intend to buy back shares and is continuing to hunt for acquisitions.
The big question – TCS or Infosys? Undoubtedly, both are winners. Infosys is currently going through a rough patch, facing a mixed set of issues right from pricing, low volumes to lack of faith in management. On the other hand, TCS is on a better wicket and today its strength is its ability to win and execute large, billion-dollar outsourcing contracts. As Infosys loses market share, TCS seems to be gaining. But in the long term, the company does not seem to have cultivated anyone after Chandrasekhar. Unlike Infosys management though, that of TCS seems more confident and optimistic making one wonder whether they are talking about the same sector?
Today, TCS seems like the winner and hence a safer bet. But in the long term, Infosys could give you better returns as today expectations from the company are at their lowest and it today available at a much discounted value. Mid and short term, Infosys is not a safe bet but those with a long term horizon can surely buy. On the other hand, expectations from TCS are only growing and to keep up with these, TCS will now be under a microscope and even a small blip will get highlighted. In terms of valuations, it is as such quoted at a premium and thus when there is a bounce back, Infosys will give you much better traction.
Keep a watch on the other two big wigs – Wipro which is scheduled to announce its numbers on 24th July and HCL Tech on 25th July. Like in Q4, HCL might pleasantly surprise us.