News Analysis

Infosys, TCS post strong numbers in a usually weak fourth quarter

K Venkatasubramanian | Updated on April 12, 2019

Digital revenues solid, but margins of IT majors show a decline

In a seasonally weak March quarter, the top two IT majors — TCS and Infosys — delivered a robust set of numbers.

The revenue growth of both the companies was healthy.

While TCS scored in terms of broad-based traction across key verticals, Infosys reported solid additions to its list of large-sized clients.

Both companies have also reported healthy digital revenues.

The one aspect that may leave the markets disappointed is the decline in the operating margins recorded by the IT majors.

During the fourth quarter, Infosys’ revenue grew 2.4 per cent sequentially in dollar terms, while TCS reported a 2.8 per cent increase in sales.

The operating margins stood at 25.6 per cent for TCS and at 21.5 per cent for Infosys, a sequential dip of 40 basis points and 110 basis points, respectively.

Healthy metrics

Digital revenues grew at a solid pace of 46.4 per cent year on year (YoY) for TCS and at 41.1 per cent for Infosys during the March quarter.

This steady growth indicates that both the companies majors have been able to tap the digital spends of clients on a significant scale.

During the period, Infosys managed to add two clients to the $100-million bucket and one in the $50-million category.

TCS reported additions only in the relatively smaller bands of $20 million and $10 million. However, the company witnessed broad-based growth across various verticals including banking and financial services, retail, communication and manufacturing, which reported faster growth compared to the company’s overall revenue rate.

Infosys’ growth, on the other hand, was more narrowly led, with only the communication and hi-tech verticals reporting solid traction.

Attrition, which was at 20.4 per cent during the quarter, continues to rise for Infosys

For TCS, attrition was recorded at 11.3 per cent.

Infosys ended FY19 with a revenue growth of 9 per cent, while TCS finished with an 11.7 per cent growth in sales.

Steady outlook

With a strong deal momentum, Infosys does look set to meet the upper end of its revenue guidance (7.5-9.5 per cent) for FY20.

With TCS too appearing on course to achieving double-digit growth in the new fiscal, the IT industry is likely to be on a high for the next year or so.

Of course, the margins could come under pressure while chasing large deals.

However, there still appears to be considerable headroom to manoeuvre for the top two players.

TCS continues to command premium valuations, trading as it does at over 25 times its trailing 12 months per share earnings.

Infosys has delivered well under the new management for much of 2018-19.

But it may take a couple of more quarters of solid performance from Infosys — which trades at a price-earnings multiple of 21 times — before markets accord the company the same valuation multiple that it assigns to TCS.

Published on April 12, 2019

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