Have the equations changed after the Q1 results?
Over the weekend both Infosys and TCS declared their Q1 results. While the stock of TCS was marginally down on Friday, Infosys cracked by nearly 10% in Friday trades. Over the last 3 quarters, Infosys has played catch up and has closed the gap with TCS on a variety of performance parameters. Does this quarter change the equation and put the advantage back in the hands of TCS?
How revenues and profits fared?
TCS reported 3.7% higher revenues in Q1 while the net profit was down by 0.4%. This was broadly in line with market expectations as slower IT spending had taken its toll on most of the large IT companies. The growth in profits was the big issue for Infosys. While Q1 revenues were higher by 2.2%, the net profits for the quarter actually fell by 4.3% in dollar terms. The big hit for Infosys came from the guidance. The actual guidance has been downgraded by nearly 150-200 basis points for the next few quarters. This is probably what spooked the markets. Of course, TCS does not provide specific earnings guidance and hence it will be hard to compare.
Did BREXIT really matter?
To begin with, it may be too premature to evaluate the impact of BREXIT as the vote just happened on June 23rd last month. Currently, TCS has a 43% exposure to UK and Europe combined while Infosys’ exposure to the overall Europe region is much lower at 23%. This will mean that Infosys is better shielded from the impact of BREXIT, especially since the impact of BREXIT is likely to result in a slowdown in both the British and the EU economies. However, the actual impact of BREXIT on growth and IT spending may have been substantially overstated by the media. Sources in both the companies have confirmed that the actually impact of BREXIT on GDP growth and IT spending might be negligible.
Other factors for comparison…
During the quarter, Infosys had greater success in adding super premium clients with annual billings in excess of $100 million. TCS added 6 clients in the $20 million+ range and another 4 clients in the $50 million+ range. While Infosys added 3 clients in the $100 million+ range, TCS did not add any in that range. Infosys has also seen its attrition rate go up marginally but that could be more of a cyclical impact.
In a nutshell, both the IT companies have been faced with negative headwinds on the growth front. Infosys may have lost that slight advantage it had built over TCS in the past 4 quarters. But the fact remains that at current valuations both stocks provide a margin of safety for investors. That may be the biggest takeaway from Q1! ©