The June quarter earnings season will get off to a more-exciting-than-usual start with both IT majors Infosys and Tata Consultancy Services coming out with their numbers on Thursday. Typically, it?s Bangalore’s Infosys that kicks off the season but this time around the Mumbai-headquartered TCS has decided it wants to be first, too.
The Infosys stock, the darling of investors for years together, has lost much of its sheen over the past year or so and has given up much of the premium it enjoyed. TCS, on the other hand, has moved up in the market capitalisation sweepstakes, actually pushing aside Reliance Industries to occupy the number one slot on a couple of occasions.
Most of the Street now believes TCS will do better than Infosys; after the March 2012 quarter numbers, JPMorgan had argued that ?TCS has deservedly emerged as the valuation benchmark in the sector ? since it had broken further away from Infosys on growth and margins. Should Infosys lowers its revenue guidance for 2012-13 as expected, it could probably command an even lower multiple than it does now.
The TCS stock has outperformed Infosys in terms of valuations as well market returns, especially over the last three months. While TCS has traded at a higher multiple since October 2010, the average premium has risen in the last three months to 25% currently.
The TCS stock outperformed spectacularly in recent months, yielding 10%, whereas the Infosys stock lost 12%. At current prices, TCS trades at a price to earnings multiple of 19 times one-year forward earnings whereas Infosys trades at 15 times forward.
The Street is now hoping Infosys will go in for a buyback to support the stock given its huge cash pile of Rs 21,000 crore at the end of March. Kotak Institutional Equities recently argued that keeping large amounts of ?excess? cash on the balance sheet has a material RoE-dilutive impact on Infosys which, coupled with its sub-par ? in relation to tier-I peers and the company?s historical performance ? revenue growth, has had a notable impact on Infosys? relative valuation multiple versus its peers.
Infosys’ revenue projections for 2012-13 could fall further largely on account of cross-currency headwinds and the lack of visibility on orders. According to Barclays Capital, Infosys is likely to see a 0.5% decline in its quarter-on-quarter revenue growth in dollar terms in the March quarter with the possibility of the annual revenue guidance being lowered to 6.5-8.5%. ?While order visibility has not warranted an upgrade, the cross-currency impact would have an estimated 1.5% impact on the top line,? it says. Quoting the company?s management, HSBC highlights that the banking, financial services and insurance vertical, which accounts for 35% of total revenues, has remained a laggard in the June quarter.
While TCS is also expected to see muted growth in the BFSI space, according to HSBC, stronger growth in India, Latin America, the UK and Europe would result in TCS leading the revenue growth in the three months to June. ?We believe in the past few quarters TCS has gained a larger share of the TCV (total contract value) from telecom and banking clients, providing it better growth visibility than peers,? says HSBC.
Many analysts believe Infosys disappointing numbers in the March quarter were a company-specific rather than an industry issue. After reporting a 4.8% sequential decline in revenues to Rs 8,852 crore, Infosys guided for an 8-10% growth in its dollar revenues for 2012-13 of Rs 34,831- 39,136 crore against expectations of a 12-14% growth. Not surprisingly, the stock was downgraded. In contrast, TCS delivered a 4.7% growth in dollar revenue and posted a 5.1% growth in international revenues.