Will TCS steal a march over Infy yet again?

India’s top IT services provider Tata Consultancy Services  is expected to put up a better first quarter performance than rival Infosys which will announce its first quarter results early Thursday. The two companies have had a contrasting performance over the last few quarters, and the Tata Group company is expected to continue to outperform its Bangalore-based rival.

Infosys has guided for 8-10% US-dollar revenue growth this year, and is expected to slash that further given the current forex rates. While the Infosys guidance is much lower than the 11-14% growth projected by NASSCOM, TCS has said in April, it was confident of beating the NASSCOM guidance.

Also read: What to expect from Infosys Q1 results

First quarter, which is usually a strong quarter, is expected to be weak this time as clients are delaying their projects because of the difficult business environment.. However, TCS has sounded more confident than some of its peers.

“Going into Q1 I feel much better than what I felt going into Q4…I had commented in January that the discretionary spend is likely to pick-up momentum only a bit later. I think it is beginning to happen. It’s eased. We are seeing the projects kicking off. We are seeing the ramp ups,” TCS CEO N Chandrasekaran had said post fourth quarter results in April.

According to a CNBC-TV18 poll, TCS is likely to report 2.5% rise in US dollar revenue, rupee revenue is seen up near 12% and profit is likely to increase near 11% to Rs 3,250 crore in April-June.

HSBC Global Research’s Yogesh Aggarwal expects TCS volumes will grow 4% sequentially, offset by a cross currency impact of around 2%. While the sharp rupee depreciation should boost margins, a wage increase and visa filing costs will partially offset margin expansion. Further, hedging loss of Rs 80 crore will impact earnings in the quarter.

Citigroup analysts Surendra Goyal and Rishi Iyer expect TCS will report flattish margins in the quarter. But moreover they are concerned with its higher exposure to the banking and financial services (BFSI) sector.

BFSI, 40% of TCS’ revenues, has among the key sectors, hit by slowdown in decision making amid the global economic uncertainties led by the Eurozone debt crisis.

Key things to watch 

  • Performance in the BFSI sector and in Europe, where TCS has higher exposure than peers
  • Comments on pricing and margins
  • A general view on the road ahead
  • Deal pipeline, any impact of slowdown in clients’ spending/decision making

Stock talk 

TCS shares were down 0.2% at Rs 1,259.25 on NSE in afternoon trade. The stock has gained near 16% since it announced its fourth quarter results in April, outperforming the broader market. The NSE Nifty index has gained 1% and the CNX IT index is up 3.5% during the same period.

TCS is expected to continue to outperform Infosys, but many analysts say current valuations are at the higher end and factor in the better fundamentals.

While HSBC still has an “overweight” rating on TCS, Standard Chartered and Citigroup have “inline” and “neutral” rating respectively. ICICI Securities advises investors “add” TCS shares.

(curtsey : money control)

Rupesh Yatesh Dalal
Head Research Department

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