Is TCS the new IT bellwether?

Nachiket Kelkar
Moneycontrol.com

Two companies, one sector, yet significantly diverse views. The results of Infosys and Tata Consultancy Services paint two different pictures for India's IT industry in FY13.

Earlier this month Infosys shocked the street with significantly lower-than-expected 8-10% US dollar revenue guidance for fiscal 2013. The guidance, which was also lower than the 11-14% growth, which industry body NASSCOM expects, left several analysts wondering if the entire Indian IT sector could feel the pinch of the global economic uncertainties.

"The year ahead looks challenging for the IT services industry, with slow recovery in the global markets," Infosys CEO and MD, SD Shibulal had said.

In contrast, TCS reported strong fourth quarter results and feels more upbeat of the year ahead. Its consolidated net profit rose 23% year-on-year to Rs 2,932.4 crore, while total income rose 30.5% year-on-year to Rs 13,259.3 crore in Jan-March.

The Tata group company's MD and CEO N Chandrasekaran said he is feeling much better going into Q1 than what he felt going into Q4 and is confident of beating NASSCOM's 11-14% growth guidance.

"I had commented in Jan 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," Chandrasekaran said.

Not surprisingly, while analysts were quick to cut Infosys earning estimates and brokerages like CLSA and Macquarie downgraded the once tech bellwether, most of them still advise a "buy" or equivalent on TCS. But are TCS' valuations justified?

TCS shares rose 12% on Tuesday as the street cheered the results and related commentary from TCS. Infosys, meanwhile, has slipped 16% since its disappointing results announcement over 10 days ago. Over the last six months too, TCS has outperformed Infosys.

So is TCS the new IT bellwether and does the Infosys guidance really matter?

"Clearly, TCS's results reinforce that a large proportion of the weakness in Infosys's operational performance is company-specific and that rest of the sector may be slowing down, but gradually at worst. The results could bring back some confidence on the demand scenario and therefore act as a catalyst for the stock," says Yogesh Aggarwal of HSBC Securities.

Abhishekh Shindadkar of ICICI Direct too believes that TCS' premium valuations will remain.
  
"Infosys has been frequently missing its guidance off-late. Further more, the management commentary coming out of TCS is far more clear then that by Infosys. The global macro issues seem to be hurting Infosys more than others," he said.

Here are some more analysts' comments.

Citigroup: TCS reported a decent quarter given the environment and low expectations post Infosys earnings. While there may be some near-term upside, the Q4 result is unlikely to result in any upgrades. Rating: Neutral. Target: Rs 1,275.

Edelweiss: The company has posted all round performance in terms of growth and margins in an uncertain environment and has registered robust growth in all verticals except BFSI (banking and financial services) and utilities. We believe TCS' investment in SGA (selling, general & administrative) and human resources is enabling it to post decent growth and earnings and we expect the momentum to continue going forward.  Rating: Buy. Target: Rs 1,275.

IDBI Capital: TCS remains fairly confident to beat NASSCOM's guidance of 11-14% growth in FY13. This indicates that the growth differential between big-2 IT companies is likely to persist for yet another year. Post TCS and HCL Tech commentary, outlook for Indian IT companies remains upbeat. We estimate just over 15% USD growth and 27.8%/27.2% EBIT margin in FY13 and FY14 respectively. Rating: Buy. Target: Rs 1,248.

Kim Eng: We remain confident of our FY13 revenue growth forecast of 20% because we believe TCS is better placed to deliver industry outperformance owing to strong momentum and comprehensive presence across service lines and regions. Rating: Buy. Target: Rs 1,350.

Kotak Institutional: TCS reported a good quarter with steady revenue growth, strong headcount additions and high conversion of EBITDA into free cash. Strong demand commentary and solid deal wins lend comfort to our 13.8% USD revenue growth projections even as concerns on demand from the financial services segment remain. Rating: Upgrade to Add from Reduce. Target: Rs 1,220.

Spark Capital: We have long held that TCS's diversified revenue profile is its competitive advantage and believe it would be so in FY13 too. We retain out view that issues plaguing Infosys are more company specific and not sectoral. Moreover we believe TCS is more diversified business than Infosys and believe the P/E premium would stay. Rating: Buy. Target: Rs 1,350.

Systematix: The fears of deterioration in demand environment that were raised after Infosys' Q4 have been allayed by TCS' in-line quarterly performance. We continue to believe that TCS' FY13 performance will remain industry leading with 13% revenue growth in US$ terms. With TCS delivering on expectations, the premium valuations to Infosys are here to stay. Rating: Accumulate.

Among other brokerages, Bank of America Merrill Lynch and Deutsche Bank too advise a "buy" on TCS with a target of Rs 1,400 and Rs 1,350 respectively. JP Morgan and HSBC are "overweight" on TCS with target of Rs 1,300 and Rs 1,365 respectively.

TCS shares were up near 12.1% at Rs 1,192.50 on NSE.

Also Read: Analysts cut Infosys earnings estimates as poor outlook shocks

nachiket.kelkar@moneycontrol.com