TCS v/s Infosys: Who is the new bellwether?

For years now, Infosys has been setting the tone of the earnings season every quarter. Investors have been so spoilt by its consistent good performance that it's taken the Street several quarters to realise the company is no longer a proxy for the entire sector.

With TCS beating the Street's Q1 estimates, it seems the baton of the bellwether has formally been passed on.

While dollar revenues of Infosys contracted by 1.1 per cent to $1.75 billion in the Q1FY13, TCS' grew 3.4 per cent to $2.73 billion. Even in terms of volumes, TCS has clocked volume growth of 5.3 per cent against Infy's 2.7 per cent in the quarter.

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The valuation gap between TCS and Infosys will only widen. According to JP Morgan, while polarisation in performance stays, there will be polarisation in valuations, too.

As has been the case for the last six quarters, shares of Infosys fell as the company failed to meet not only the Street's expectations but its own guidance too, which suggests that the company does not have revenue visibility.

There are some things that don't add up in Infy's numbers. For one, Infy's margins have contracted by 190 basis points sequentially, despite a 10 per cent fall in the rupee.

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Typically, for every one per cent fall in the rupee, margins expand by 40 basis points. Therefore, this quarter margins should have moved by four per cent. Even volume growth is not showing up in revenues.

The company has blamed it on cross currency turmoil and "sporadic price renegotiations". Pricing is down by 400 basis points in the June quarter and analysts expect this to continue.

TCS has managed to hold on to its operating margins at 27.5 per cent, even after giving wage hikes.

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Infosys has not given wage rises this year and yet has seen margins fall. If it gives hikes later this year, its margins may be further hit.

TCS has scored on another parameter. Its utilisation rates have been maintained at 81.3 per cent. Infosys, in contrast, is expecting full year utilisation rates to be 69-71 per cent.

Infosys, on the other hand, is becoming a cause of concern largely because it is changing its revenue mix. Flipping a company's business model and changing the revenue mix is never easy.

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That, too, in a couple of years. So, it's not surprising that Infosys is struggling to meet its guidance quarter after quarter, as it seeks to shift the company's revenues away from the commoditised application development and maintenance to high-margin segments like consulting, package system integration and product platform solutions.

The pain is not yet over. Infosys has revised its FY13 revenue growth guidance down from 8-10 per cent to five per cent.

This will imply a three per cent sequential growth for the next three quarters. Challenging, as Q1 is the strongest and in this period, the company's revenues have contracted.