In slow December quarter, TCS beats Infosys

, : Tata Consultancy Services Ltd grew faster than its closest rival Infosys Ltd in the December quarter, and beat profit estimates, although both the IT industry heavyweights are at risk of registering among their slowest pace of annual growth. At least one third of TCS’s incremental growth in the third quarter was driven by a large contract it secured from state owned telecom firm BSNL.

Without including that, its performance was only a tad better than that of Infosys, which posted a third straight quarter of muted performance with both revenue and profit falling short of Street expectations. Also, TCS, the country’s largest technology services company, and Infosys saw their combined workforce decline sequentially by 11,781 in the October December quarter.

The two companies together accounted for about one fifth of the IT industry’s $245 billion revenue in FY2022 2023. On Thursday, TCS reported revenue of $7.28 billion for the seasonally weak third quarter, representing a 1% sequential increase from the July September period and a 2.9% increase from the same period a year earlier.

It added $206 million in incremental revenue, of which $84 million came from its India business, a bulk of it from the BSNL contract. Net profit improved 2.7% sequentially, and by 7% from a year earlier, to $1.41 billion. Bloomberg, based on a survey of 24 analysts, had estimated TCS to report a profit of $1.38 billion on net sales of $7.23 billion for the third quarter.

Infosys reported a sharper contraction in business, as revenue totaled $4.66 billion–a 1.2% sequential decline and only a 0.1% improvement from the same year ago period. Consolidated net profit for the December quarter was $733 million, down 2.3% sequentially and 8.3% year on year. Analysts had expected Infosys’s revenue at $4.65 billion and net profit at $741.3 million.

Infosys, which in April last year had projected its FY 2023 2024 revenue to grow at 4 7% in constant currency terms, now expects to end the financial year with a 1.5 2% growth. TCS does not provide quarterly or annual projections. “Large deal renewals (for Infosys) also look to be at the negative end.

If you look at their past quarterly trends, this is among their lowest deal bookings in the December quarter," said Apurva Prasad, vice president of institutional equity at brokerage HDFC Securities. “Discretionary spend is on the lower side too, as demand in the quarter was lower." Over the first three quarters (April December), TCS has managed a 4.7% growth in dollar revenue, while Infosys has grown at 2.5%.

Considering that the fourth quarter is also seasonally weak, both companies run the risk of clocking among their slowest full year growth. Save for TCS’s 0.7% growth in the year ended March 2021, as covid brought businesses to a halt, the company’s slowest growth was 5.3% in the year ended March 2010.

Infosys reported its weakest growth of 3.03% in the same year. At the heart of the underperformance by the two IT giants this year is the global slowdown amid high interest rates, which have prompted many Fortune 1000 companies to either hold back on tech spending or defer the start of some of the work.

This is reflected in the muted growth in the US and slowing business from global banks, the two biggest spenders for services offered by the home grown IT giants. Business from North America, which brings about half of the business for TCS, declined 3% in constant currency terms in the December quarter from the year ago period.

Growth in TCS’s banking, financial services and insurance segment, which accounts for over a third of its revenue, fell 3% from a year earlier. At Infosys, revenue from the US and the BFSI segment declined 4.9% and 5.9%, respectively. Also, more Fortune 500 companies are scaling up their own technology centres, or so called global capability centres.

The rise of disruptive technologies such as generative artificial intelligence tools has also made many boffins inside Walmart stores or JP Morgan relook at what tech work can be outsourced to firms like TCS and Infosys. Both the companies announced after the end of trading in Mumbai. On Thursday, TCS shares ended 0.61% higher, while Infosys’s stock fell 1.62%, even as the benchmark Sensex ended largely unchanged at 71,721.18 points.

TCS also managed to improve its profitability as operating margin in the December quarter widened by 70 basis points sequentially and by 50 bps from the year ago period to 25%. Infosys’s operating margin declined by 70 bps sequentially to 20.5%. (One basis point is one hundredth of a percentage point.) The TCS management declined to comment on when it expects business to pick up.

“Nothing much has changed on the ground," said TCS chief executive and managing director K. Krithivasan when asked if Fortune 500 companies were increasing their tech budgets. “But it was a strong performance in a seasonally weak quarter." Infosys CEO Salil Parekh said the company’s performance was “resilient".

“Typically, the third quarter has large furloughs and other end of year holidays, and we’ve seen that continue," said Parekh. Omkar Tanksale, equity research analyst at brokerage Axis Securities, said a significant number of senior executive exits from Infosys over the past year is likely to affect the company’s “deal ramp up and execution capabilities." “When so many senior level exits happen from a well established company, this affects clients’ confidence in the company’s sustained ability to offer competitive solutions.

TCS is navigating the bearish market sentiments much better in this regard," he said. HCL Technologies Ltd and Ltd, India’s third and fourth largest IT services firms, will announce their third quarter earnings on Friday. ( ) Livemint tops charts as the fastest growing news website in the world to know more.

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