Analysts' top reasons for Infosys fall, TCS rise

BANGALORE, INDIA: It's an ongoing tussle for the revered bellwether slot among the top Indian IT majors. Especially, between the country's top exporter Tata Consultancy Services (TCS) and the second-placed Infosys Limited.

The two companies account for nearly a quarter of the country's software exports, and the IT services sector, at $100 billion, makes up one-fourth of India's total exports.

Infosys was the numero uno Indian IT service provider just a few years ago, but TCS pipped it to grab the position since then. That way, the latest results announcements of their respective first quarter also served as a strong indication of the continuing reign of TCS and Infy's dwindling fortunes.

In the first quarter of 2012, TCS reported a 38 per cent rise in revenues and 33 per cent in net profit, helped by a weaker rupee and increase in demand for outsourcing. And as expected, TCS results were better than that of Infosys, which posted a 33 per cent rise in its fiscal first-quarter profit.

TCS posted net profit of Rs. 3317.68 crore for the quarter ended in June. In contrast, Infosys's net profit was Rs. 2,289 crore, with a YoY revenue growth of 28.5 per cent.

As both the top-two companies announced their results on the same day this time around, June 12, analysts had little time to compare and draw their conclusions. By and large, their verdict is that TCS would continue rising despite prevailing uncertainty and Infosys might have to wait for good times to be back.

At this point, it is said that TCS would beat industry body NASSCOM's estimate of 10-12 per cent growth for the full year, while Infosys has already lowered its guidance to 5 per cent. Another pertinent point is that Infosys has missed its own guidance over successive quarters.

So, what were the major factors that led to the results of both IT majors?

Partha Iyengar, country manager for research at Gartner India, has been quoted saying that the results reflected a changing of the guard among India’s IT service providers. "It would be a mistake going forward to continue to tie the industry's fortunes to that of Infosys, as the market has historically done. It is time to change that thinking now."

Here are five top reasons, as observed by analysts from different firms, though not particularly in that order:

1. The US and Europe account for 80 per cent of TCS' revenues and 86 per cent of the revenues of Infosys. TCS is seeing better traction in terms of its business outlook and business prospects are not as bad as painted by Infosys.

"We believe that Infosys has been slow to adapt to the new demand environment," Sandeep Muthangi, an analyst at IIFL Capital, has said.

2. Analysts feel the improved performance by TCS could be attributed to its better showing in emerging markets, such as China and Latin America, among other regions.

At the same time, Infosys's heavy dependence on U.S. and Europe, apart from the recent leadership transformation and its inability to keep prices up for clients is said to be the IT major's undoing.

3. TCS has improved margins even after rolling out pay hikes, whereas Infosys has postponed annual increments till now in the current year.

How it has affected the latter is reflected in its growing attrition rate. It was 14.9 per cent this quarter, as against 14.7 last quarter — which, compared to its employee base, appears higher than TCS, which has reported an attrition of 12 per cent in the first quarter against an attrition of 12.2 per cent in the fourth quarter. The utilization rate at TCS (excluding trainees) was at 81.6 per cent, while that of Infy was around 78-81 per cent.

But then, it is to be noted that the first quarter always sees the highest attrition rate, as employees quit to pursue their higher education during this time of the year.

4. During the quarter, TCS had eight $100 million-plus deals. The addition of 29 new clients and growing revenues from existing clients led to a 5.3 per cent increase in the volume of business transacted during the quarter compared with the previous quarter.

Infosys had lost one $100 million-plus client, though it added one in the $200 million-plus category.

5. Infy also faced cancellation of a major programme in the energy and utilities space in Europe, which proved costly for the company, while TCS didn't report any such event.

With market volatility still hanging around and not much visibility on client spending, it's not easy to predict who would emerge stronger at the end of it all. But whoever withstands all the pressure and meets or beats expectations can hope to stay ahead of the curve.