Infosys delivers a steady performance amidst leadership transition
Infosys profit margins this year have more or less converged with that of TCS this year, compared to a difference of as much as 570 basis points about three years ago
Infosys Ltd reported 5.8% year-on-year growth in revenues in constant currency terms in the December quarter, slightly lower than the 6.2% growth reported by Tata Consultancy Services Ltd (TCS). Likewise, growth in operating profit at the companies wasn’t very different last quarter. In short, Infosys has done well in a period during which it functioned without an active chief executive officer (CEO).
Of course, TCS has been growing at a sluggish pace (bit.ly/2CUp4AW) and hasn’t exactly set a high bar to beat. Still, the fact that Infosys delivered steady growth in a seasonally weak quarter, and in the midst of a leadership transition, is a heartening sign.
Besides, as the chart alongside points out, Infosys’s profit margins this year have more or less converged with that of TCS this year, compared to a difference of as much as 570 basis points about three years ago.
As a result of this catch-up, Infosys’s operating profit growth in the first three quarters is slightly ahead of its bigger rival.
While Infosys shares have recovered all of their losses since Vishal Sikka’s exit (and then gained some more), they still trade at an 18% valuation discount to TCS shares based on the current year’s earnings estimates. Just before Sikka announced his resignation, the valuation discount was narrower at around 13%.
With Infosys delivering better profit growth, perhaps investors need to sit up and take notice. Interestingly, Infosys’s commentary on the key banking, financial services and insurance (BFSI) vertical is far more optimistic than TCS’s.
While the latter said it will be a couple of quarters before there is a meaningful recovery in the segment, Infosys said 2018 will be better compared to the previous year. A majority of its large deal wins are from the segment, and the company said on a call with analysts that regulatory spend and digital engagements are expected to drive growth in BFSI.
“We expect discretionary spending to come back next fiscal; and things are not as hazy as a year ago,” Infosys said in post-results comments.
In the December quarter, the BFSI segment’s revenues were flat sequentially, better than the 1.5% decline reported by TCS. From the looks of it, the client mix of the two companies is behind the difference in commentary.
True, TCS has other engines firing away but as its third quarter results announcement showed, BFSI with its 33% contribution to revenues can pull down overall growth to a large extent.
What’s more, analysts expect recent tax reforms in the US to have a negligible impact on Infosys, compared to being a headwind for TCS.
Having said all this, investors may still be a tad cautious with Infosys, considering that its new CEO hasn’t yet clearly articulated his strategies and priorities.
But, based on how things stand currently in terms of growth rates, and given the difference in commentary, some of them may well start wondering about their higher allocations towards TCS in the past few months.
The writers do not hold positions in the companies mentioned above.