It’s official. Tata Consultancy Services (TCS) is the new information technology bellwether, not Infosys Technologies.
It took the Tata firm five straight quarters of outperforming Infosys on volume, or the number of hours billed to clients, and six straight quarters of better employee retention (see chart) to get here.
But it was well worth the effort, for in a complete role reversal, analysts have started assigning TCS a valuation premium over Infosys. On an average, analysts have assigned around 10% premium to their FY12 expected earnings multiple to arrive at the recommended target price.
“With such continued outperformance, TCS has consolidated its position as the new leader of the IT sector, a position which was claimed by Infosys till now,” Jaypee Capital’s IT analysts Vijay Gautam and Krupa B Shah notes in their Friday report on TCS.
In terms of absolute profits generated, the gap between TCS and Infosys has widened from almost nothing two years ago to as much as 38% now. In a market that fell as much as 10% in the year-to-date period, TCS has more or less held ground, with a fall of just 1.5% as against Infosys’s fall of 21% during the same period.
Infosys was once the default choice of fund managers for filling up a part of their IT stocks portfolio — a privilege at risk now.
“We believe Infosys is losing its ‘MUST OWN’ status in the investor’s portfolio by coming up with negative surprises more regularly than ever before,” notes Pratik Gandhi of IDBI Capital.
JP Morgan analysts say the re-rating has been playing out over several quarters as a result of the nimble organisational structure TCS put in place some time back.
By the same token, however, Infosys may be back in reckoning in a quarter or two as its recent organisational restructuring starts paying off.
“Structural rerating or derating stories play out over six-eight quarters, which is what we have seen in the case of TCS versus Infosys,” Viju George of JP Morgan told CNBC TV18 in an interview. “Infosys will probably start giving TCS a run in terms of quarterly growth rate, maybe from Q3FY12-Q4FY12 onwards.”
It may be a coincidence, but it was nearly seven quarters ago that TCS got a new chief executive, N Chandrasekaran, who took over from S Ramadorai.
At a little over 26% operating profit margin, TCS matched Infosys for the first time this quarter.
However, it was more of a function of Infosys seeing margin erosion than TCS substantially increasing its profit margins.
Also, running at high employee utilisation of about 83% and a very young work force with an average age of 28, TCS does not have much lever left to rev up the engine further from here.
On the other hand, Infosys has a much lower employee utilisation rate of around 73%, giving it much more headroom to ramp up under the right conditions.