Here's how analysts view Infosys, TCS Q1 results

Moneycontrol Bureau

If one thought earnings announcements by India's top two software services providers would give a clear direction for the IT industry, then it has been anything but. Infosys and Tata Consultancy Services announced their first quarter earnings on Thursday and it's been a tale of contrasts.

Infosys missed estimates once again and cut full year US dollar revenue growth forecast. On the other hand TCS reported better-than-expected earnings.

While TCS said there was strong growth across all its service lines and industry segments and it continued to see good demand from global companies, Infosys' continued stress on the global economic challenges and slowing spends by clients suggests there could be some company and client specific issues.

Also Read: Infosys vs TCS: How the numbers stack up head-to-head

Infosys shares extended Thursday's losses on Friday and was down 0.6% at Rs 2,250.05 in noon trade on NSE. TCS was up 2% at Rs 1,260.90.

Here's a quick reaction from analysts on the two companies.

Analysts on Infosys:

ANGEL BROKING: Post 1.1% qoq decline in USD revenue, the company requires 3% ask rate in Q2-Q4 to achieve 5% growth this year, which, at current scenario of company’s performance, looks a bit stretched. In addition, the company has stopped issuing quarterly guidance, which is discomforting. Rating: Accumulate. Target: Rs 2,530.

BRICS: We have reduced dollar revenue estimates by 3.8% and 5.4% for FY13 and FY14 respectively due to project start volatility and sudden ramp-downs. Rating: Add. Target: Cut to Rs 2,350 from Rs 2,600, due to challenging environment, uncertainty of clients' spending pattern and higher exposure to discretionary spends.

GOLDMAN SACHS: Decline in blended pricing by 3.7% qoq (3rd consecutive qoq decline), with both onsite and offshore pricing down by 3.4%/3.8%, suggests Infosys may be facing pressure from clients under significant cost restraint, coupled with change in portfolio mix. A 2.7% volume growth was surprising, suggesting clients are asking to do more work with same budgets resulting in higher volumes at lower pricing. Rating: Neutral.

ICICI SECURITIES: Infosys surprised negatively yet again – this time on pricing and margins. The key question remains as to whether Infosys has reset expectations low enough or could we envision further modest downside to expectations. The new guidance for 5% revenue growth requires a Q2-Q4 CQGR of 3.1%. Rating: Buy. Target: Cut to Rs 2,570 from Rs 2,800.
 
IIFL: The repeated guidance misses and a sharp fall in realisations highlight the structural issues at Infosys. Further, despite strong performance from larger peers such as TCS, the Infosys management continues to insist that deteriorating demand environment is the key issue. We believe Infosys has tough choices ahead as it tries to adapt to the new demand environment characterised by increasing commoditisation of traditional services, complex structuring of contracts and a portfolio approach to deal wins. Rating: Add. Target: Rs 2,288.

RELIGARE INSTITUTIONAL: With macro environment weak and Infosys continuing to underperform peers, we expect growth to remain muted. While the stock is not expensive, upsides remain limited till there is improvement in macro and/or turnaround in performance. Rating: Cut to Hold. Target: Rs 2,500.

Analysts on TCS:

BANK OF AMERICA - MERRILL LYNCH: Volume growth beat even our above consensus estimates, stable pricing likely assuaged concerns of industry wide price disruption and encouraging management commentary on robust deal wins and pipeline. We raise FY13/14/15 estimates and price obective  by 1-2%. Rating: Buy.

DEUTSCHE BANK: We were particularly impressed by 5.9% qoq volume growth in international business. Strong deal wins and healthy migration of customers in the USD5-50 million revenue buckets increases our confidence in the sustainability of the volume growth despite pressure on IT spending of large clients. Rating: Buy. Target: Rs 1,450.

GOLDMAN SACHS: TCS may have been a key beneficiary of counter-cyclicality in IT spends, similar to peers like HCL. Strength in challenged segments of BFSI and in Europe has resulted in sectorleading growth. Exposure to integrated banks (with retail operations)
and a few large deals in insurance may be reason for TCS' outperformance in BFSI vertical, despite concerns surrounding budget cuts. Rating: Neutral.

IIFL: TCS' valuations are at a premium to other IT vendors. However, given the robust revenue growth and reasonably strong management
commentary, we expect the valuation premium to sustain. Rating: Add. Target; Rs 1,333.

RELIGARE INSTITUTIONAL: We expect TCS to continue delivering industry leading growth and build in 14% CAGR over FY12-14 ahead of other large cap peers. Margins should hold up and there is little reason to expect slip-up in the near-term given strong execution track record. Rating: Cut to Hold on valuations. Target: Rs 1,325.

SUNIDHI INSTITUTIONAL: The fact that TCS has given an 8% wage hike to its offshore employees (versus a freeze at peer) clearly indicates TCS is seeing better traction in terms of its business outlook and business prospects are not as bad as painted by Infosys. Rating: Raised to Neutral. Target: Rs 1,330.

Nachiket Kelkar
nachiket.kelkar@network18online.com