TCS on a roll; as Infosys lags

Tata Consultancy Services (TCS) has outperformed Infosys and the market with its strong growth in revenue and net profit during the quarter ended June 2014.

TCS's revenue grew 23 per cent and profit by 32 per cent. Analysts were expecting year on year revenue and net profit growth of about 16 per cent each (See: TCS Q1 net vaults nearly 27% to Rs5,058 crore).

Infosys on the other hand had reported a weaker performance compared to TCS with revenue of 13 per cent and net profit growth of 22 per cent. Most analysts had estimated revenue and profit growth of around 14 per cent each (See: Infosys Q1 net profit jumps 21.6% to Rs2,886 crore).

Changes in depreciation policy and marginal adjustments have driven 2-4 per cent profit for Infosys, says analyst at Kotak Securities.

TCS's growth during the quarter has come on the back of scale up in most large geographies, such as telecom, media and entertainment and manufacturing. BFSI and retail segment grew below average. TCS has received several new projects in emerging areas like mobility, big data, front office transformation, cloud and analytics, says Kotak analyst.

What hit Infosys badly in terms was revenue growth was decline in onsite and offshore pricing by at least 50-60 bps. Analysts believe that sustained weakness in pricing could be attributable to realignment of company's pricing structure with the market.

Infosys maintained its annual dollar revenue growth guidance of 7-9 per cent for the financial year ending 2015 banking on an improved performance in the remainder of the year. Guidance implies 2.3-3.5 per cent quarter on quarter growth rate for the next three quarters

TCS management has maintained its optimism on the demand scenario, backed by higher clarity and no delays in decision making by clients. Based on the interactions with clients, TCS management has maintained that FY15 growth will be better than FY14.

Assuming that TCS maintains the revenue trend and the net profit it registered in the first quarter for the remaining three quarters, the company's profit would be $4 billion on revenues of Rs100,000 crore for the financial year ending March 2015 (See: TCS may join Rs100,000-revenue club in 2015; $4 bn net profit likely).

Hiring, a lead indicator of confidence on demand, suggest a lot more demand slowdown for Infosys than TCS. Employee strength at TCS has increase by 27,845 in the last four quarters compared to a modest 4021 for Infosys.

Attrition at Infosys has remained elevated for many quarters now despite multiple corrective steps undertaken by the management. Infosys' quarterly annualized attrition in 1QFY15 was 26.4 per cent, the highest since June 2010. Attrition at TCS was at 11 per cent on a LTM basis in the IT services business (10.3 per cent in 4Q).  Including BPO, it increased to 12 per cent due to seasonality.